Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Third-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments over the next quarter.
For the first time in a decade, Greek voters will elect a government without their country being part of an economic rescue program. Markets have reacted positively in anticipation of the July 7 vote since opinion polls have the conservative New Democracy party securing another victory, after squarely defeating the ruling Syriza party in the recent EU parliamentary elections. But despite the opposition party's campaign promises to accelerate Greece's recovery through pro-business policies, if elected, its leaders will soon find that the complicated issues underpinning Athens' economic malaise and geopolitical constraints will not be solved in one term — or several, for that matter.
The Greek economy is growing again, albeit slowly. A decade of economic crisis has left Athens with crippling debt, high unemployment and a lack of skilled workers. This, coupled with an aging population, will continue to impede Greece's full recovery. So while Athens may no longer represent the existential threat to the eurozone that it did just a few years ago, it nonetheless remains one of the weaker links in the currency bloc.
The Rise of the Conservatives
Prime Minister Alexis Tsipras and his left-wing Syriza party took office in 2015 with a mandate to renegotiate Greece's massive debt. This pledge, however, was short-lived: Six months later, Athens accepted a new bailout package from the European Union and the International Monetary Fund. The bailout allowed Greece to remain in the eurozone and regain some degree of economic stability. But it came at the price of unpopular tax hikes and spending cuts to meet the creditors' demand that Greece maintain a primary fiscal surplus of at least 3.5 percent of its gross domestic product (GDP) — a goal that Athens over-accomplished many times, as the primary surplus reached 4.5 percent of GDP in 2018.
The past three years of austerity measures have since taken their toll on Syriza's popularity, with polls now placing the ruling party roughly 10 points behind its conservative rival New Democracy. To some degree, Syriza is also paying the price for a 2018 deal Greece reached with North Macedonia to change its name. The agreement removed a source of political tension in the Western Balkans, and was praised by both Brussels and the United States — putting North Macedonia one step closer to eventually joining NATO and the European Union. However, the name change didn't sit well with many Greek voters, who felt betrayed by their government. New Democracy, meanwhile, has opposed the deal from the start.
Desperate to improve his government's deteriorating support, Tsipras announced tax cuts and bonus payments for pensioners earlier this year. But this soon proved to be insufficient after New Democracy won 33 percent of the vote in the European Parliament elections (compared to Syriza's 24 percent) on May 26, before going on to take control of 12 of Greece's 13 regions in regional elections, as well as the government of Athens and other key cities in municipal elections.
A Recovery on Shaky Ground
Leading up to the July election, New Democracy's campaign has focused on lowering taxes, reducing public spending, speeding up the privatization of state-owned companies, and eliminating the bureaucratic red tape constraining Greece's economic growth. Syriza, meanwhile, has pledged to strengthen the country's welfare state after several tough years of spending cuts and tax hikes. However, no matter what party is in power, the next government in Athens will have to deal with an uneven economic recovery in a country still reeling from a decadeslong crisis.
Greece's economy is expected to grow by more than 2 percent this year — a pace twice the average for the eurozone. But its economy is still considerably smaller than what it was when the crisis first hit in 2009. The same can also be said for the country's labor market. Unemployment is now at around 18 percent, almost 10 points lower than what it was during the peak of the crisis in 2015. But it is still significantly higher than pre-crisis levels, when unemployment averaged about 9 percent. Moreover, compared to its EU peers, Greece still has the highest youth unemployment rate at roughly 40 percent, as well as one of the lowest labor force participation rates for women at roughly 45 percent.
Regardless of who's in power, Athens' next leaders will have to deal with an uneven economic recovery in a country still reeling from a decadeslong crisis.
In addition to high unemployment, the informal economy also continues to weigh heavily on Greece's financial health. According to a 2017 report released by the University of Tubingen, off-the-book economic activities reportedly make up an estimated 21.5 percent of Greece's GDP — the highest of any developed country. For Athens, informal employment is a double-edged sword. On one hand, it means that many of the people accounted for in the official unemployment rate actually have jobs. On the other hand, it also means thousands of Greeks are working under precarious conditions, do not pay work-related taxes, and struggle to access credit or save money.
In the long run, however, Greece's economy and labor market face a more existential crisis. According to Eurostat, Greece's population fell from 11 million to 10.7 million between 2009 and 2018, due mostly to emigration. To some extent, this has helped reduce pressure on the labor market, with fewer workers competing for jobs. But over the years, this continued outflow of people will shrink both the size and skill level of Greece's labor force as the most highly trained workers leave the country — many of whom will never return home, making it harder for Greek companies to find talented workers. The process of population aging and shrinking is particularly problematic in Greece, which has one of the lowest birth rates (1.3 children per woman) and one of the highest life expectancies (81 years) in the world.
In the coming decades, Greece's aging population — coupled with its dwindling labor pool — will add pressure on the country's pension and health care system, and will limit the room for sustained economic growth. This will make it even harder for Greece to dig itself out of its massive debt burden, which currently exceeds 180 percent of GDP. And as a result, the next Greek government — and those that come after it — will be under the weight of the country's heaping debt for decades to come.
Moreover, Greek banks are only beginning to recover from a decade of crisis. While the rate of nonperforming loans has fallen in recent years, it still represents around 45 percent of all loans held by Greek banks. This will continue to hinder banks' ability to grant credit to households and companies in the country, thereby weakening one of the main drivers of economic growth. To improve credit conditions in the country, the next administration in Athens will, therefore, have to work with Greek banks on new plans to accelerate the reduction of nonperforming loans.
A Complex Geopolitical Landscape
Apart from a fragile economic recovery, the next Greek government will also have to navigate a complex geopolitical environment. The name agreement with North Macedonia will likely remain in place regardless of who wins the upcoming election due to pressure from the European Union and the United States. However, a new conservative administration in Greece may have colder ties with its northern neighbor than Tsipras' left-wing administration. After agreeing to change its name, North Macedonia is now seeking to join the European Union and NATO, both of which Greece is a member of. And while Athens is unlikely to outright block Skopje's applications, there's a chance a New Democracy-led government would be less enthusiastic about North Macedonia's push to fully integrate with the two Western institutions.
At the same time, the next Greek government will also face an increasingly intricate situation in the Eastern Mediterranean. Greece's tenuous relationship with Turkey remains in a delicate balance. The two countries cooperate on certain issues, such as Turkey's role in preventing asylum seekers from entering Greek territory. But they often clash on others — namely, on disputes over Cyprus, as well as territorial feuds regarding their national airspace and the Aegean Sea. When it comes to Cyprus in particular, Athens backs the internationally recognized and majority Greek-speaking Republic of Cyprus, while Ankara alone recognizes the majority Turkish-speaking Turkish Republic of Northern Cyprus.
This point of contention has recently manifested in disputes over Cyprus' energy resources. Turkey questions parts of the Republic of Cyprus' offshore natural gas exploration in the Eastern Mediterranean Sea, arguing that Northern Cyprus also has the right to drill in the area. Ankara also argues that some parts of the Republic of Cyprus' exclusive economic area violate some sectors of Turkey's continental shelf. Tensions escalated in May, when a Turkish drilling vessel entered disputed waters.
Future governments will be under the weight of Greece's crippling deficit for decades to come.
Talks for the reunification of the island are intermittent and will likely continue to plague Greece's government in the coming years as sticking points such as the political organization of the reunited country, the presence of foreign military troops and compensation for those who lost their property amid the conflict continue to stall progress. The current Greek administration has meanwhile sought closer political, economic and military ties with the United States in recent months, seeking to exploit the White House's often tense relationship with Turkey — a strategy unlikely to change under a new Greek administration.
Regardless of its outcome, the July 7 vote will mark another step toward Greece's slow normalization process following a decade of economic crisis. But even if New Democracy wins as expected, the change in leadership won't result in a miraculous recovery any time soon given the magnitude and multitude of problems Greece faces at home and abroad.