On September 1st, Greece achieved an economic milestone. Capital controls imposed in 2015 at the height of the financial crisis were lifted, meaning many Greek households and companies will no longer face restrictions on transferring money abroad, while simultaneously making Greece much more attractive to foreign financial investors.

Unemployment has fallen below 18 percent compared to its peak of nearly 28 percent during the crisis in 2013. In the meantime, Greek state bonds continue to drop, while stocks and retail sales rise; all signs of increased confidence in Greece’s economy.

“From today, capital controls are a thing of the past”, Prime Minister Kyriakos Mitsotakis told lawmakers in parliament on August 26th. “It marks a return to normality and growing confidence”, said Bank of Greece Governor Yannis Stournaras.

Greek banks also continue to shed non-performing loans as part of the country’s overall economic recovery. Targets have set out to slash bad loans by half, or below 20 percent by the end of 2021. “We are witnessing a significant improvement in the economic outlook, evidenced by the sharp decline in Greek government bond yields”, Vassilios Psaltis, Chief Executive of Alpha Bank, said in a statement.

Greece’s relative economic health and stable recovery shows the success of the European Stability Mechanism, which was only completed last year. The stability support programme was designed to address long-term structural issues that contributed to Greece’s financial crisis in the first place. The mechanism distributed 61.9 billion euros over three years. In return, Greece implemented comprehensive and wide-ranging reforms that have not only helped the economy recover, but have also protected Greece from future crashes.

Pierre Moscovici, the Commissioner for Economic and Financial Affairs, Taxation and Customs, stated “Greece has come a long way since completing its stability support programme a year ago. Economic data is showing positive signs, indicating efforts will continue to bear fruit for a society that has seen a lot of hardship.”

Valdis Dombrovskis, Vice President for the Euro and Social Dialogue and Commissioner for Financial Stability, noted that Greece’s growth since completing the programme has remained steady, adding that “It is important to build on these achievements by continuing on the path of responsible fiscal policies and structural reforms, including those aimed at strengthening the Greek financial sector.”

A Month of Finances

September is “budget season” in the EU, making this month a pivotal one. Greece is required to turn in its budget figures and update the European Commission with its continued fiscal reforms, while the draft 2020 budget will be debated in parliament in October or November of this year. On September 4th, ELSTAT, the EU’s statistical authority, released provisional data on GDP growth for the second quarter of 2019. Economic growth climbed to 1.9 percent, a slight increase from 1.3 percent in the first quarter.

On September 5th, the Euro Working Group met with Michalis Argyrou, Greece’s new representative and President of the Council of Economic Experts. There, Argyrou presented on how Greece intends to implement its new budget and updated the EU on government plans for the economy, as well as the progress already made during the post-bailout period.

Over the weekend, Prime Minister Kyriakos Mitsotakis addressed the business community at the annual Thessaloniki International Fair, outlining the government’s economic policy, the fast-tracking of reforms, along with additional tax cuts. “Greece is no longer Europe’s black sheep”, said Mitsotakis, pledging that Greece would soon be a “pleasant surprise for Europe”.

After having legislated a 22 percent tax cut to the ENFIA – an unpopular annual property tax – in August, as well as reviving a plan for tax arrears to be repaid in 120 monthly instalments, Greece’s Prime Minister announced that in 2020 the corporate tax rate will be slashed from its current rate of 28 percent to 24 percent. Social security contributions will also be progressively reduced by 5 percent by 2023, and the government has set out to suspend value added tax on new constructions for three years, along with capital gains tax on property sales.

A new bill is due to pass next month to legislate the reforms.

Most importantly, however, is the emphasis the Prime Minister placed on creating a pro-business environment and galvanising investment projects. Chief among his priorities is rolling ahead with the previously blocked 8 billion euro Hellinikon project. Slated to break ground in 2020, the redevelopment of the coastal area that once housed Athens international airport is anticipated to create as many as 10,000 jobs during its construction phase, and 75,000 upon completion.

Rounding out a month of finances, Greece’s new Finance Minister Christos Staikouras will participate in an informal Eurogroup session in Helsinki on September 13th. Several days later, representatives of Greece’s lenders are slated to arrive in Athens in advance of an evaluation of the fourth post-bailout program, set to take place on September 23rd.

September is also when the first instalment of the reduced ENFIA, and the second instalment of income tax, are due. Staikouras, has said that sweeping tax reforms will be his “key priority” in ensuring Greece has continued growth and solid credibility with investors. Part of centre-right New Democracy’s plan is a comprehensive tax reform “that will have a four-year horizon and will accelerate growth”, and mostly focuses on reducing income and corporation tax, cutting VAT, streamlining tax incentives for investors, and abolishing emergency levies that were imposed during the debt crisis as part of the conditions set by bailout creditors.

“The fundamental objective is to achieve sustainable high growth rates so as to gradually restore the country’s lost wealth,” Staikouras said in an interview. New Democracy came to power in snap elections in August 2019 on a campaign of tax cuts and job creation, and they are committed to promoting privatisation and foreign investment in Greece.

“We are taking ownership of the reform agenda…we will implement structural reforms in a front-loaded manner”, said Staikouras. “We’ve agreed [with the EU] to accelerate privatisations because we believe they can contribute to sustainable growth rates when…they’re carried out under conditions of absolute transparency and also include a social return.”

Staikouras has likewise revived a plan for early repayment of 3 billion euros out of Greece’s 8.5 billion euro debt, owed to the IMF, which carries an interest rate of 5.1 percent. This comes after Greece successfully raised 2.5 billion euros selling seven-year bonds issued at a record low yield of 1.9 percent. “Our goal is the swift implementation of a coherent and realistic but outward-looking economic plan”, says Staikouras. “We have to move the economy to an upward virtuous spiral.”

Greece’s Finance Minister has an advantage here. He was the former Deputy Finance Minister between 2012 and 2014 and oversaw the national accounts during Greece’s second bailout. Staikouras knows how to pace tax cuts to prevent Greece from backsliding on commitments to creditors, while also attaining an annual budgetary surplus before debt repayments of 3.5 percent GDP.

Strained Relationships with the Neighbours

Things may be sunny in Greece for now, but the recently concluded political crisis in Italy does not bode well for the Mediterranean region. While the world waits to see if – or more likely when an international recession occurs – the barely-balanced political situation in Italy threatens to trigger its own debt crisis .

Greece’s debt eclipses Italy’s, but its finances remain steadier as Italy balances on the cusp of its third recession within a decade. Italy’s economy is ten times the size of Greece’s, and the third largest in the eurozone. And yet, if Italy’s finances do not hold steady, it could spell trouble for European financial markets, which could have ripple effects across the region, the eurozone, and at a global level.

Though October snap elections have been successfully averted, reducing political uncertainty for now, the Italian banking system remains burdened with non-performing loans and public debt. Should a recession hit, Italy is likely to sell more bonds, increasing borrowing costs relative to Germany and sending global financial markets reeling.

Economic destabilisation would be the opening Salvini needs to roar back into politics, but a new Salvini government would be even less willing to comply with EU Commission budgetary requirements or austerity.

Meanwhile, Greek Finance Minister Christos Staikouras has not made any predictions for 2020 or 2021, yet remains confident that Greece will beat its growth target of 2 percent for 2019. Still, even higher growth rates are needed to make up for the 25 percent drop in GDP during the height of the crisis. Prime Minister Mitsotakis argues that the high surplus has a deleterious effect by discouraging consumption and investment, having begun talks with the EU to reduce the necessary surplus from 3.5 percent GDP to 2.5 percent, which may kick in as early as next year.

Ricardo Garcia, chief eurozone economist at UBS Global Wealth Management, has said the market has been “giving some advance credit” to the new government’s economic reform programme. While he expects debt burden will continue to shrink, a global recession would undoubtedly hamper Greece’s progress, making some investors sceptical. “The worst is over but there is still a stigma; we see it with our clients”, said Garcia. “There is still this image of Greece being a speculative investment.