We entered 2021 with good omens. Joe Biden was elected President of the United States. Despite old age and serious health problems, at least he was not the “rude” and “unpredictable” Donald Trump. Biden’s campaign promises were moderate, in Greek terms a bit to the right of the Movement for Change (KINAL).
A year later, things are very different and unfortunately darker. President Biden has taken some of the positions on redistribution and taxation of Senator Bernie Sanders, the only self-proclaimed socialist in the United States Senate. Biden has given billions of dollars in grants that the United States will never get a chance to collect in taxes, even if they are raised significantly.
Spending trillions of dollars created a huge demand for goods without a commensurate increase in production, leading to inflation. Used car prices soared 20% and the prices of many goods rose, pushing inflation to 6.8%, a 30-year high. Many companies have announced further increases from the first day of 2022. The huge increase in demand has also caused problems in the supply chain and led to shortages. Many of those who received grants in 2021 did not return to work when their jobs resumed, waiting to spend the grants first.
Changes to tax rules have reduced incentives to invest in the United States, making it almost certain that China will replace the United States as the world’s largest economy in a few years. Fortunately, the Federal Reserve, at its last meeting, decided that inflation is not transient and planned three interest rate hikes in 2022 to bring inflation under control.
In foreign policy, the disorderly exit of the United States from Afghanistan underscored the president’s weakness. China “remembered” the Maoist slogans urging the conquest of Taiwan and hardened its foreign policy in general. Russia is playing poker with the price of natural gas, holding the EU hostage in its confrontation with the United States over Ukraine, having already engulfed Crimea under Barack Obama. The president’s apparent weakness in defining a credible foreign policy prompts Vladimir Putin and Xi Jinping to take extremely destabilizing actions.
In these gloomy circumstances, the Omicron variant of Covid-19 has emerged, about five times more contagious than the previous ones. Current evidence shows that it usually causes a mild infection. However, even though few infected have a severe case, its wide and rapid spread could put a strain on the healthcare system around the world. Economic analysts are already reducing growth estimates because of Omicron.
In this difficult context, Greece is emerging from a decade of economic crisis burdened with a huge public debt while a neighboring country dreams of a medieval caliphate that would have conquered Greece, the Balkans, Cyprus, Egypt, Israel , Syria, Iraq, United Arab Emirates and Saudi Arabia. The United States’ withdrawal from the Middle East under Trump and the exit from Afghanistan under Biden has given Turkey the opportunity to attempt to play a regional leadership role.
Today Turkey occupies parts of Cyprus, Syria and Iraq, and played a central role in Azerbaijan’s attack on Armenia. It also transported and deployed Islamist mercenaries from Turkey-occupied Syria to Libya and Azerbaijan, thus becoming a leader of international terrorism. Turkey’s 10-year campaign of expansionist aggression has not been the subject of serious sanctions from NATO or the EU. It is therefore not surprising that he has multiplied his aspirations and made maximalist demands as far as the Libyan Sea.
On the other hand, successive Greek governments have refrained from defining the Greek exclusive economic zone vis-à-vis Libya, Cyprus and Turkey. Fortunately for Greece, the current government is rearming Greece and forging strategic alliances with Israel, Egypt and other Arab countries.
With regard to the Greek economy, Greece has managed to attract significant investments from abroad (Microsoft, Pfizer, Amazon) and the new development of the old Elliniko airport has started. To offset a decade-long investment shortage, Greece needs very significant additional investment.
On tax issues, Greece is doing well as the European Central Bank continues to buy Greek bonds even though they are not of investment grade quality. Participation in the ECB’s quantitative easing and other programs reduced the interest rates paid by Greece, its banks and large corporations, contributing significantly to the growth of the Greek economy. Of course, it is essential that Greece reach investment grade so that it is supported by the ECB in its own right and not on an exceptional basis. Additionally, in 2022 or 2023, the Covid-related temporary suspension of EU budget deficit rules will end, and mandatory surplus rules will likely return.
This means that Greece only has a period of a few months of independent economic policy before returning to some degree of EU supervision. Credit rating agencies view strong growth in Q2 and Q3 2021 positively, but are calling for structural reforms to boost Greece’s credit rating. Many of these structural reforms were proposed by the Troika a decade earlier, but successive Greek governments have avoided implementing them so as not to pay the political cost as well.
Over the past two years, the government has lacked a strong political opponent. On the one hand, this enabled it to implement important structural reforms. On the other hand, without a significant political opponent, inertia tends to gain the upper hand. Greek society is deeply conservative, and many important participants (unions, large companies) are “comfortable” with the status quo and put considerable pressure on each government not to change anything at all.
Simple and obvious changes such as the harmonization of Greece’s competition law with that of the EU have met with furious opposition from the comfortable OTE. However, development in Greece requires low telecom tariffs, not the highest in the EU! Businesses even oppose the regular collection of information on industrial activity by the Competition Commission. These are just a few examples among many.
The justice system is in tatters, the sentences for the same offense change dramatically from day to day. Final court rulings take a decade to be rendered, prompting unscrupulous prosecutions of fictitious crimes dragging their opponents to court for a decade. The labor market, despite constructive changes, is inflexible, offering incentives for temporary part-time hires rather than full-time permanent hires. The banks have taken steps to reduce nonperforming loans but have not yet cleared their books of these loans in order to be able to finance the development of the Greek economy.
Prime Minister Kyriakos Mitsotakis was elected to carry out the reforms. Paradoxically, the pandemic has helped provide European funds that can be used for investments. Thus, Greece now has the capacity to invest in areas that will radically transform it, such as new digital technologies. However, conservatism, expressed mainly by the left and the far right, as well as the unions and the various monopoly companies, is pushing the government hard to keep nothing at all. After two years in power, the dilemma facing the Prime Minister is whether to make far-reaching reforms or succumb to inertia. If he chooses the former, he can be remembered with the ultimate reformer of modern Greece, Eleftherios Venizelos.
Nicholas Economides is a professor at the Leonard N. Stern School of Business at New York University.