The forecast is based on the assumption that New Democracy (Samaras) will increase its electorate by around 1 million voters, receiving votes from a decrease in abstinence, and inflows from Independent Greeks (Kammenos) and Golden Dawn (Mihaloliakos) parties, as well as other minor parties, whose voters moved towards ND, i.e. Democratic Alliance (Dora Bakoyannis), Drasi (Manos) and Re-Create Greece (Tzimeros).

As regards SYRIZA (Tsipras), it will see an increase in its electorate power that will remain under 550,000 people, as compared with May results.

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Ioannis Kamaras (PhD Economics, Sussex University) is a former Director, Bank of Greece. In the late 1990s, he served as a Commissioner of the -then- Bank of Crete, during the Koskotas scandal. 

The Greek economy contracted sharply in 2011 due to strong fiscal retrenchment, severe economic dislocation and weak exports. Unemployment has risen rapidly, especially among the young. Output is set to decline further until the second half of 2013 when the pace of fiscal consolidation is expected to ease somewhat, wide-ranging structural reforms to boost competitiveness and promote investment start to bear fruit, and international demand strengthens. These projections assume that the EU/IMF programme of fiscal consolidation and structural reform is fully implemented.

The economic adjustment programme approved in March 2012 gives Greece time to proceed with the fundamental reforms it needs. It should be implemented rigorously to restore growth and stabilise the public finances.

According to OECD Outlook, the global economy is, once again, trying to return to growth, helped by a modest pick-up of trade and an improvement in confidence. It is doing so, however, at different speeds, with the United States and Japan growing at a stronger pace than the euro area and large emerging economies enjoying a moderate cyclical upswing. Different dynamics are also developing in labour markets in the United States, where unemployment is slowly decreasing, and in the euro area, where instead it keeps rising.

OECD noted: “Almost five years ago, in the summer of 2007, turbulence in the US subprime market sparked off the most dramatic financial and economic crisis in several decades. After five years we cannot yet say that the crisis is behind us. More than once signs of recovery have disappointed. Policy mistakes have been made, sometimes reflecting inaccurate reading of events, at other times reflecting policy and political failures. Is it different this time? As long as confidence is not rebuilt on a solid basis with the right policy choices, downside risks will prevail. This is important everywhere but particularly so in the euro area, where crisis management goes hand in hand with the building of the institutions needed for a monetary union to work properly.”

Olli Rehn, EU Commissioner for Economic and Monetary Affairs and the Euro said: “A recovery is in sight, but the economic situation remains fragile, with still large disparities across Member States. We are witnessing an ongoing adjustment of the fiscal and structural imbalances built up before and after the onset of the crisis, made worse by the still weak economic sentiment Without further determined action, however, low growth in the EU could remain. Sound public finances are the condition for lasting growth, and building on the new strong framework for economic governance, we must support the adjustment by accelerating stability and growth-enhancing policies.”

Greece

According to the report, the contraction in Greek economic activity in the fourth quarter of 2011 was far deeper than expected. The quarterly accounts indicate that real GDP fell by 7.5% in the last three months of 2011, compared with the same quarter of 2010. For the year as a whole, real GDP is estimated to have contracted by 6.9%. In 2012 a further contraction is expected, resulting from both a significant fall in internal demand and less dynamism in exports than expected. Households’ disposable income being hit by rising unemployment, cuts in private sector wages and the fiscal measures will keep domestic demand contracting. Also, unfavourable business and consumer sentiment and difficulties in access to credit for firms and households will contribute to their postponing spending decisions. The recovery, which was previously expected for this year, will be further delayed with, at best, an insignificant improvement in activity in 2013.

Employment has taken a heavy blow in the face of contracting economic activity. Total employment declined by almost 7% in 2011 and an additional fall is forecast in 2012, with the unemployment rate projected at 20%. Labour market reforms are expected to provide a significant contribution towards both stabilising the employment level and creating new jobs in the medium-term perspective; however, employment is not expected to stabilise before 2013, and the subsequent recovery in the number of jobs will be slow.

The 2011 general government deficit fell to 9.1% of GDP from 10.3% of GDP in 2010. The decline in the deficit ratio resulted from an increase in the revenue-to-GDP ratio of 1.2 pps., while the primary expenditure ratio as a share of GDP fell by 1.4 pps. The increase in interest expenditure of more than 1 pp. means that the improvement in the primary deficit was almost 21⁄2 pps. The general government consolidated gross debt in 2011 was above 165% of GDP, up from 145% of GDP in 2010.

In 2012 the general government deficit is projected at 7.3% of GDP, which is consistent with a target for the primary deficit of 1% of GDP. To achieve this objective, the Government adopted cuts in expenditure of 1.5% of GDP in the first quarter. The Government aims at achieving a primary surplus of 1.8% of GDP in 2013. Based on current projections, this would require additional expenditure savings of 3.8% of GDP to be identified in coming months.

The implementation of the debt exchange (private sector involvement or PSI) will help to put Greek public finances back on a sustainable path. However, given the sluggish economy, the debt ratio will only start to decline in a sustainable manner after 2013.

BoG chief stressed that the economic situation, both at home and abroad, leaves no room for complacency. “To take advantage of the new opportunity, we must promptly implement what we have agreed to and make up for previous delays. There is no easy way out of the crisis. The adjustment must be pursued with determination”, he said.

According to Provopoulos, current pre-electoral period has temporarily sidelined planned reforms. “If, after the elections, there is any question about the will of the new government and society to implement the programme, today’s favourable prospects will be reversed; the country will then be at risk of finding itself very soon in a particularly adverse situation, which will impact negatively on citizens’ morale”, he said.

According to BoG Governor, what is at stake is the choice between: An orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners; or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union.

Bank of Greece noted the following:

- The recession that began in 2008 continues. In 2011, real GDP contracted by 6.9%. The situation worsened in the fourth quarter, reflecting, among other things, the fact that uncertainty remained high. The decline in GDP was driven by the fall in both consumption and investment, the latter dropping by more than 20%. A further reason for the deterioration in GDP in the fourth quarter of 2011 was the halt in the upward trend in real exports of goods, after four successive quarters of growth. Exports of goods increased on average in 2011, but more slowly than in 2010 (3.6% against 5.4%). The decline in exports in the fourth quarter can be attributed not only to the slowdown in economic activity in our trading partners, but also to financial constraints faced by exporting firms (in particular, limited access to bank and trade credit).

- On the supply side, output of the secondary sector fell sharply (almost twice as much as in 2010: -12%, compared with -6.1%). The decline in output of the tertiary sector intensified as well (-5.9%, against -3.1%). By contrast, agricultural output increased by 2.5%, but, because of the sector’s small size, this positive development had little effect on GDP as a whole. The decline in production was the main cause of the net loss of some 300,000 jobs and the surge in the number of the unemployed by approximately 250,000 people in 2011.

- Conditions in the financial sector deteriorated. The rate of credit expansion to the private sector, which has been steadily decelerating since 2008, turned negative in 2011. While this development can be partly attributed to reduced demand for credit on account of the recession, an important factor was also the liquidity squeeze experienced by banks, resulting from the loss of confidence brought about by the fiscal crisis. Today many sound businesses are suffering the consequences of that squeeze.

- The general government deficit as a percentage of GDP was reduced by 1.2 percentage point in 2011, according to figures released yesterday, while the primary deficit was reduced by 2.5% of GDP. Furthermore, in the first quarter of 2012, the central government deficit, on a cash basis, decreased markedly year-on-year, while a primary surplus in the order of 0.5% of GDP was recorded, compared with a primary deficit of 0.5% of GDP over the corresponding period in 2011. Primary expenditure fell, albeit less than targeted, due to increased subsidies to social security funds. Attaining the full-year targets will obviously require persistent efforts.

The Bank of Greece forecasts an average annual rate of decline in GDP of close to 5%; implying that the recession will be less pronounced than in 2011; this forecast assumes that the necessary structural reforms will be implemented without delay. The average unemployment rate is projected to increase this year and exceed 19%, up from 17.7% last year. Finally, the downward trend in inflation will also continue in 2012, with average annual inflation expected to be around 1.2%. In 2013 inflation is projected to fall further, possibly to below 0.5%.