Greece's Political Stability Rests on Government's Performance in Local Polls

Greece is bracing for the first round of local elections on Sunday (7 November), which could determine the future direction of the Greek political scene. Voters will chose from a plethora of candidates vying to become one of Greece's 13 regional governors (periferiach), the highest position in the country's local government. The Greeks will also vote on a new system of local government with a reduced number of regions and fewer local government employees. The new system is designed to be less costly, while also maintaining, if not improving, its overall effectiveness.

Risky Move

Under normal circumstances, the upcoming local polls would not have significant importance for the wider political stability of the country. However, Sunday's poll is perceived as an unofficial national referendum or public vote of confidence in the ruling centre-left government led by the Panhellenic Socialist Movement (PASOK) of Prime Minister George Papandreou, and its austerity programme. The PASOK government assumed power following last year's October snap parliamentary election, defeating its centre-right counterpart, the New Democracy (ND) party. Ensuing revelations about the true state of the country's public finances have created market uproar, as well as forcing Greece to solicit an international rescue package in order to stave off bankruptcy and assuage contagion concerns related to other highly indebted Eurozone economies. In May, Greece accepted a financial rescue package from international lenders, including the International Monetary Fund (IMF), the World Bank, and the European Central Bank, worth 110 billion euro (US$156.1 billion). In return, the government pledged to pursue an array of restructuring and cost-cutting measures, aimed at helping the Greek economy recover and improve its long-term performance. Some of the immediate measures include: an increase in value-added tax (VAT), from 19% to 21% in March, and to 23% in July; pension system reform, including a later retirement age; and an overhaul of the public sector, with cuts to public servants' wages. The government has also pledged to open up restricted professions, including truck drivers, notaries, taxi drivers, and pharmacists, as well as privatise loss-making companies, notably Hellenic Railways (OTE). So far, progress on the deficit-reduction front has been impressive. However, given the large size of the deficit and the weakness of the economy, fiscal consolidation is only likely to be achieved over a long period of adjustment.

Although the public generally acknowledges that reforms are needed, the aforementioned measures have caused considerable tensions, with nationwide protests and sectoral strikes frequently taking place. The local elections will be an important test for the already-reshuffled PASOK administration, and positive results would indeed provide Papandreou with enough breathing space and a stronger mandate to continue its austerity drive. Last week, the premier warned that if voters turned away from PASOK, he might call an early general election, possibly as early as next month. Nonetheless, neither Papandreou, nor his party confirmed the threshold for such a move. Such a move is both bold as well as risky: many PASOK supporters who are generally unsatisfied with the PASOK mandate, but oppose the early poll, may feel black-mailed by Papandreou's call, which could also affect the party's long-term popularity. Nonetheless, fearing the prospect of yet another snap election, Papandreou's warning could prompt more PASOK supporters to cast their votes, even if they originally planned to abstain otherwise.

Outlook and Implications

The outcome of the local polls is too close to predict, and it is also uncertain whether Papandreou would really go ahead and call an early general election should his party perform weakly come Sunday. While markets remain sceptical as to whether Greece can sustain its current austerity drive amid strikes, and now security scares after recent militant terrorist activities (see Greece: 3 November 2010: Greece Suspends International Mail Following Further Parcel-Bomb Seizures), Greece has been praised for its progress in implementing reforms and meeting conditions to qualify for instalments of the international credit facility. However, more needs to be done, especially on the tax-collection front, and in fighting corruption and easing red tape in public services. An early parliamentary election would throw Greece into a period of political instability, increasing markets' and lenders' doubts about the country's resolve and seriousness to push ahead with reforms, and the potential for the past months' improvements to be reversed. This could also undermine Greece's credibility in the eyes of investors and international partners, and inevitably prolong, if not deepen, its economic and financial woes.

PASOK currently holds a thin, but still comfortable parliamentary majority, which could change if the early parliamentary election was held now. The party still remains the most popular in Greece, overreaching the ND as well as other smaller factions currently represented in opposition. However, its popularity is waning, and it is highly unlikely that a snap election would lead to a strong result, as was seen in 2009. In the best case scenario, PASOK would gain a razor-thin majority, however the more likely outcome would be that it would lose its majority but remain the biggest single party in parliament. This would force PASOK to reach out to other smaller parliamentary parties with the aim of creating a coalition government. Both of these options would make the government's ability to pass future structural reforms more difficult. This would also undermine Greece's overall political stability and inevitably also its long-term economic recovery.

It is uncertain whether the Sunday vote will turn out in favour of the government, or whether the voters are set to turn their back on Greece's political system completely, through either abstaining or supporting smaller factions. What is, however, certain, is that Greece is bracing itself for yet another nail-biting vote which will determine its political future as well as the direction of reforms.