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Turning vice to virtue

14 April 2014 By Hugo Dixon

Most Greeks know the expression vicious cycle – or favlos kyklos. But when you ask them the Greek for virtuous cycle, they often struggle to find the term, or even deny it exists.

After six years of recession that have shrunk the economy by a quarter and left Greece with an unemployment rate of 27 percent, it is not surprising that vicious cycles loom large in the national psyche. But there is a Greek expression for virtuous cycle – enaretos kyklos – and the country may be beginning to enjoy one.

Athens returned to the bond market last week with the issue of 3 billion euros of five-year paper. The country’s banks are also able to raise equity on the market.

The challenge now is to take this positive momentum in financial markets and use it to build on the tentative signs of recovery in the real economy. Confidence can be infectious. It is not just financial investors who are giving Athens the thumbs-up. So are Greece’s euro zone partners, led by Germany’s Angela Merkel, who was in Athens last Friday.

The main channel through which a virtuous cycle could operate is investment, which will create the badly-needed jobs. As Greek banks find it easier to fund themselves, they will start supplying more credit to local companies, which have been starved of cash. Foreigners are also starting to invest now that Greece has lower wages and cheaper property.

Antonis Samaras, the centre-right prime minister, plans to present the country’s new “growth model” later this month to tap this potential. The idea is that the Greek economy of the future will be less focussed on consumption and more on investment and exports. It will seek to position itself as a supplier of higher-end tourism, logistics, transport and food.

But the emergence of such a virtuous circle is not guaranteed. As ever, the main risk is politics: either that Samaras’ fragile coalition will fall; or that it will lack the will to push through the further structural reforms that are needed to change the country for good.

Unfortunately, the possibility that the government will fall cannot be discounted given Samaras’ habit of damaging himself. The latest self-inflicted wound occurred earlier this month when his chief of staff was caught on video telling the Golden Dawn’s spokesman that the government had intervened with the judiciary to put the leadership of the extreme right political party behind bars. At the very least, this incident shows Samaras lacked judgment in keeping such a man so close to him for so long.

That said, the government will probably survive this particular wound. There is even a chance that it will continue in power until June 2016, the latest a general election can be held.

The main hurdle is the election of a new president in March 2015. Under the Greek constitution, 60 percent of MPs have to approve the choice, otherwise there is a new general election. The problem is that Samaras can count on just over 50 percent. Fortunately, he seems prepared to propose a centre-left candidate in the hope of gathering the extra 10 percent required.

Another welcome development is that an opposition victory in the next general election wouldn’t be as scary as it would have been a couple of years ago. The radical left Syriza party still has populist plans – such as rehiring redundant public sector workers. But some of its MPs are moderating their views. What’s more, Syriza is unlikely to be able to rule on its own.

A possible partner is an entirely new party, To Potami, which is now third in the opinion polls (after Syriza and Samaras’ New Democracy) though it didn’t even exist two months ago. To Potami is a centre/centre-left party that is pro-European and pro-market.

Stavros Theodorakis, a former journalist who is To Potami’s leader, says he wants to go after the big and small parasites that have held the country back for decades. There is certainly a lot to tackle – whether it is the oligarchs who control the media and inflate oil prices or the anti-competitive practices that keep up the cost of everything from milk to legal services, not to mention widespread tax evasion.

To Potami’s leaders have no political track record. Indeed, candidates are not allowed to be professional politicians. What’s more, its plans are fuzzy. However, the party could be a moderating influence as a coalition partner for either Syriza or Samaras after the next elections.

In the meantime, the big question is whether Samaras will implement fully the 300 actions he has agreed with his euro zone partners and the International Monetary Fund. These are mainly to do with modernising the country and liberalising the economy.

Samaras himself is not a natural reformer. But Yiannis Stournaras, his finance minister, is. One concern is that Stournaras may be moved in a reshuffle. This is not necessarily a bad idea if he takes over as head of the central bank and is replaced by Stavros Papastavrou, Samaras’ pro-market European adviser – as one of the rumours swirling around Greece, where I have spent the past week, has it.

But it would be a crying shame if, having come so far, Greece didn’t finish the job. Or as the Greek expression goes: we’ve eaten the donkey; let’s not leave its tail.


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