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Jul 8, 2019 | 17:47 GMT

4 mins read

Greece: A Tough Road Awaits Athens' New Conservative Government

(Stratfor)
The Big Picture

Greece was at the epicenter of the eurozone's economic crisis of the late 2000s and early 2010s. Although the Greek economy is growing again, the country still must contend with high unemployment rates, a heavy debt burden and a fragile banking sector. Athens' new government will face significant limitations as it attempts to introduce pro-business and market-friendly policies over the next few years. 

A New Day for New Democracy 

Kyriakos Mitsotakis, the leader of the conservative New Democracy party, was sworn in as the new Greek prime minister on July 8 after his party won the country's general election. New Democracy received roughly 40 percent of the vote in the July 7 contest, securing 158 of the 300 seats in the Greek parliament — thereby ending the left-wing Syriza party's four and a half years in power. 

Mitsotakis has promised to cut taxes, increase flexibility in the labor market and turn Greece into an overall more attractive destination for foreign investors. Markets have thus unsurprisingly welcomed his victory, with the Greek stock exchange's general index ticking up and the interest rates on Greek debt ticking down. However, the new prime minister will inherit a country still reeling from the aftermath of a 10-year economic crisis, which will limit his administration's ability to fulfill its ambitious campaign promises.

Domestic Policy Challenges

When it comes to domestic policy, Mitsotakis and his New Democracy party will first set out on tackling the following key challenges:

  • Completing the process of cleansing the Greek banking sector from its huge burden of non-performing loans — a consequence of the country's decadelong crisis. 
  • Continuing to privatize state-owned companies, a key requirement by Greece's foreign lenders but one that the outgoing Syriza government implemented slowly and reluctantly. 
  • Making Greece's economy more competitive through measures such as reforming the country's labor legislation to make it more flexible and reducing the bureaucratic red tape that often deters investment.

The party's newly minted majority in the Greek parliament will enable Mitsotakis' government to pass legislation without having to compromise with other parties. But while this will help the administration achieve some of these domestic policy goals, the heavy burden of Greece's massive debt (which exceeds 176 percent of its gross domestic product) will limit the government's ability to implement fiscal reforms for decades to come. 

At the same time, the Syriza party (now in the opposition) will be ready to take to the streets to protest against the new government's agenda. But perhaps most importantly, Greece's deep-rooted structural problems — which range from high levels of tax evasion to vested interests that resist economic reforms — will also continue to constrain Athens' room for action.

Foreign Policy Challenges

Mitsotakis' foreign policy challenges will be equally daunting. New Democracy is critical of the recent agreement that Syriza reached with North Macedonia to change its name. However, Mitsotakis' administration will face significant U.S. and EU pressure not to withdraw from the name deal. This means that while there will be room for diplomatic tensions between Athens and Skopje, Greece will probably ultimately respect the deal. The new government is also unlikely to outright derail North Macedonia's current path to NATO accession but could delay the process. 

Greece's new prime minister will inherit a country still reeling from the aftermath of a 10-year economic crisis, which will limit his administration's ability to pursue its pro-business agenda.

Mitsotakis will take office at a time when disputes in the Eastern Mediterranean are growing more intense. His new administration will continue to support the Republic of Cyprus and criticize Turkey's attempts to explore for natural gas in the contested sectors of Cyprus' exclusive economic area. Athens and Nicosia have both asked the European Union to sanction Turkey, but it's unlikely that Ankara will stand down from its actions in the region any time soon. Just hours after congratulating Mitsotakis on his July 7 win, the Turkish government sent a second drillship to explore for hydrocarbons off the Cypriot coast — likely indicating its confidence that the European Union will have a hard time mustering up a unanimous vote to impose any substantial sanctions against it.

Meanwhile, the new Greek government is also likely to seek to remain on good terms with the United States at a time when its relations with Turkey have hit a new low, following Ankara's purchase and deployment of the Russian-made S-400 air defense system. 

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