A Greek Economic Revival
Surprise: Tax cuts and deregulation boost Europe’s laggard.
You’ll never guess which European country recently earned a credit-rating upgrade: Greece. Yes, that Greece. The eurozone’s perennial laggard suddenly finds itself six months into a remarkable economic turnaround.
Fitch on Friday upgraded Athens’ government debt one notch, to BB, and signaled more optimism about the economy and government finances. Athens remains two levels below investment grade in Fitch’s eyes, but investors are more bullish. The yield on Greek sovereign bonds fell to an all-time low of about 1.15% Monday, compared to 1.04% for Italy.
Investors also think Athens’s goal of 2.8% GDP growth this year and 3%-4% growth beyond that is obtainable. The stock market surged 49% in 2019, mostly in the second half of the year. Business confidence is higher than in the eurozone overall, and unemployment of 16.6% in October was the lowest since 2011.
Credit Kyriakos Mitsotakis, the former McKinsey consultant whom fed-up voters elected prime minister in July after a decade of failed experiments with centrist technocracy and radical leftism. Mr. Mitsotakis, leader of the center-right New Democracy party, is trying something else: supply-side reforms.
Mr. Mitsotakis has cut the top tax rate on corporate profits to 24% from 28%, and some individuals have seen their tax rate fall to 9% from 22% and their property taxes cut. He aims to introduce a flat tax of €100,000 for wealthy foreigners who move to Greece to invest. He’s also dusting off privatization plans shelved by left-wing predecessor Alexis Tsipras.
Rapid growth offers Greece its best hope in a decade of alleviating a government debt burden of nearly 180% of GDP, and allowing banks to climb out from under a suffocating load of bad debt. A lot can still go wrong. Greece is exposed to the vicissitudes of global trade policy in the Donald Trump era and to the European Union’s wrangles with Britain over trade after Brexit. Voters willing to give Mr. Mitsotakis a chance last year will have to remain hopeful long enough to allow the full reform program to take effect, and Mr. Mitsotakis will have to keep his nerve.
But Athens has already proven the Keynesian doubters wrong. Bailout after bailout after dreary bailout failed because EU leaders took slow growth for granted and focused instead on tax increases to salvage the fisc. Even now, the EU and International Monetary Fund think Mr. Mitsotakis’s growth forecasts are too optimistic. Greeks decided to give hope a chance instead, and so far they’re being rewarded.
Source: https://www.wsj.com/articles/a-greek-economic-revival-11580343225