Greece Business Forecast Report

Election Clouds Outlook Early elections have been called in Greece as intense pressure on Prime Minister Costas Karamanlis eventually forced him to dissolve parliament. After a long period of political instability and social tension, the October 4 ballot will give the public an opportunity to choose between the conservative New Democracy and socialist PASOK parties at a time when strong leadership is vital to guide the country through a painful recession. Opinion polls suggest that PASOK will win the election, though it is unclear whether it will be able to form a majority government. An inconclusive result could be damaging given the current economic climate, and would hold sharp downside risks for local equities and bonds, at least in the short term. A lack of political consensus and widespread public mistrust of politicians mean the upside potential to Greece's short-term political risk rating (63.5) is limited.

Both main political parties are gearing up for a short and intense election campaign, which will be dominated by economic issues. Karamanlis had promised to continue with the tough, uncompromising reforms that are required to bring the budget deficit under control. PASOK leader George Papandreau, on the other hand, has pledged to stimulate economic growth by boosting wages for lower-income groups and increasing public investment. We believe PASOK's proposals will be more popular among voters, and should ensure victory in the October election. However, if PASOK enters into government with a weak mandate, this will complicate the policy agenda.

PASOK's economic strategy is also a source of concern, in our view, given Greece's weak fiscal position. We forecast a budget deficit of 6.5% of GDP in 2009, and do not envisage a return to sub- 3% deficits in the coming five years. Boosting growth via a fiscal stimulus should restore revenue growth, but it must be accompanied by structural reforms to cut the state's current expenditure (which is dominated by public sector wages and benefits). Pressure from the European Commission will provide an important policy anchor, though we do not expect a PASOK government to prioritise deficit reduction over social and welfare programs. This could lead to even more severe long-term problems in public finances, as an ageing population puts even more pressure on both revenues and spending in the future.

Greece's business environment remains relatively uncompetitive in regional terms. In the World Economic Forum's 2010 Competitiveness report, Greece was ranked a disappointing 72nd, above only Bulgaria in the EU. Suffocating red tape, widespread corruption and inflexible labour market regulations are among the key obstacles to conducting business in Greece. Both political parties have promised to improve conditions for investors, though the country's long history of unfulfilled rhetoric does not inspire much confidence in change now. Making local businesses more competitive is vital for encouraging export expansion and setting the economy on a more balanced and sustainable growth path.