[June 20, 2007] Greece risk: Political stability risk Tweet (RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentB27B27Political stability riskA10A10Note: E=most risky; 100=most risky.SUMMARY Greece has a well-established, functioning parliamentary democracy with clear separation of the different branches of government. The centre-right New Democracy (ND) government is likely to complete all or most of its four-year parliamentary term to March 2008. There is a strong possibility that an early election may be called by November 2007 at the latest. The government has turned its attention to measures of structural reform, including changes in the labour law and the pension system, as well as the liberalisation of markets in network industries. However, it is proceeding cautiously, seeking to 'sell' reform to the trade union movement and the electorate. ND's tactic is to prepare the ground during this term and take action in a second term. The government seems to have the luxury of time on its hands because the opposition Panhellenic Socialist Movement (Pasok) is still floundering. The unions will continue to resist economic reform. SCENARIOS Tensions rise sharply with Turkey over the issue of Cyprus (Moderate Risk) Failure to make progress towards a solution to the Cyprus stand-off may increase tensions between Greece and Turkey as the latter finds its bid to join the EU partially dependent on a resolution to the Cyprus issue. At the summit of EU leaders in December 2004, the extension of Turkeys customs union agreement with the EU to Cyprus was made a condition for Turkey to start EU membership negotiations in October 2005 (The condition was met formally with the signing of the additional protocol but it has not been ratified and Turkey has not yet agreed to open its sea and air ports to Cypriot ships and planes). On October 3rd 2005 a deal was finally struck by EU government leaders that officially opened accession negotiations to Turkey (and to Croatia) and postponed the issue of recognition of Cyprus by Turkey until December 2006. The Greek Cypriots have blocked the EU's direct-trade measures because they consider that opening trade relations would constitute de facto recognition of the Turkish Republic of Northern Cyprus (TRNC), which is not internationally recognised, except by Turkey. The EU insists that the two issues cannot be linked and decided in December 2006 to suspend negotiations on eight of the 35 chapters. Little progress is expected until after the Turkish parliamentary election, now scheduled to take place on July 22nd (three months early, in a bid to resolve a crisis that erupted at the end of April over the presidential election) and the presidential election in Cyprus in February 2008. Mr Karamanlis has said EU values are not compatible with war threats and maintaining troops on Cyprus. He has distanced Greece from involvement with the Cyprus problem since the Greek Cypriot communitys rejection April 2004 at a referendum of the latest UN-backed re-unification plan. The rejection meant that only the Greek Cypriots joined the EU in May 2004, although the Turkish Cypriot community, in a separate referendum, had voted in favour of a settlement. Renewed instability in the Balkans leads to unrest in Greece and trade disruption (Moderate Risk) The Balkans are now viewed by Greece as a greater threat to security than Turkey. Greece has offered tentative support to the Ahtisaari plan for UN supervised independence for Kosovo, although it has stressed that it believes that the proposed timetable for its implementation is too short. Greece and other countries of the region fear that the granting of independence to Kosovo could lead Albanian militants to overrun the remaining Serb enclaves in order to create an ethnically homogeneous state, leading to a fresh refugee crisis, and to seize territory in southern Serbia and the Former Yugoslav Republic of Macedonia in an effort to link up with their Albanian homeland. Greece, whose long-standing policy has been that there should be no boundary changes in the region, has played a key role in the evolution of the EUs Stabilisation and Association Process, which foresees eventual accession of all the countries of the western Balkans once human rights and civil society have been fully restored and their economies sufficiently stabilised to compete. This, however, is a long-term project. Greece has some 600 troops serving with the NATO-led peacekeeping force in Kosovo. Fighting in Macedonia or Serbia immediately affects Greece as it disrupts an important trade route, adding to import and export costs while also damaging Greek companies operating in these countries. In addition, any fighting in the Balkans tends to fuel Greek nationalism which has a strong anti-Western and anti-American tint. Businesses relying on the Balkan trade route should always have alternative routes available. There are some 600,000 Albanians in Greece, many of them illegal economic migrants, while Greek firms--including banks, mobile phone companies, the oil industry and garment manufacturers--have invested millions of euros in Albania. BACKGROUND (Updated: May 10th, 2007) Political Forces New Democracy (ND) was founded by Constantine Karamanlis as a moderate umbrella organisation of right-of-centre groupssuch as liberals, conservatives and former royalistsdedicated to restoring democracy and political stability to Greece after military rule. Although the party officially espouses free-market rhetoric, its record in government has been mixed, and there is a strong etatist element. In 1997 the party elected Costas Karamanlis, the nephew of the party founder, as its leader. Initially seen as a compromise candidate who could paper over the divergent trends in the party, he has, through a process of persuasion and discipline, managed to create a relatively coherent party of a centre-right orientation. In the 2004 election campaign there was little to distinguish the social policies of ND and Pasok. The Panhellenic Socialist Movement (Pasok) is the descendant of the Panhellenic Resistance Movement (PAK), an underground group that opposed the military dictatorship (1967-74). It was basically a political movement, but did not eschew violence. Under its founder, Andreas Papandreou, the party pursued policies of wealth redistribution and adopted an anti-American and anti-EU international policy stance. From 1996, under the stewardship of Costas Simitis, the party gradually began to evolve as a European social-democratic party. Simitis governments stuck by the letter of their international treaty obligations, such as those with NATO, while still managing to sustain a relatively independent national posture. The new party leader, George Papandreou, is seeking to transform the once rigidly hierarchical party machine, based on an extensive network of branches and an internal balance of factions, into a looser coalition of interest groups with more direct access to central office. The Communist Party of Greece (KKE), led by Aleka Papariga, has endured a number of splits through the years. In 1991 hardline elements took over the party and withdrew from a coalition of left-wing forces. The KKE's members are ageing and their numbers are dwindling, but it still managed to increase its share of the popular vote to 5.9% in the March 2004 general election, making it the third-largest party. It retains extensive influence in both the trade union movement, the agricultural community, which it regularly uses to organise protests against policies of further market liberalisation. The KKE is fiercely anti-American. It has a growing influence among the student population, fostered by its opposition to the war in Iraq. The Coalition of Left and Progressive Forces (Synaspismos) was originally formed in 1989 as an alliance between the KKE and ten left-wing groups to fight the general election of that year. The transformation of the coalition into a political party in its own right in 1991 resulted in the withdrawal of the KKE. In the 2000 and the 2004 elections it barely scraped past the 3% threshold necessary to secure seats in parliament. Following the party's poor showing in both the national and the European elections in 2004 its long-time leader, Nikos Constantopoulos, stood down, and in December Alekos Alevanos, a former member of the KKE, was elected to replace him. Under his leadership the party has moved to the left and has eschewed any notion of political co-operation with Pasok. There has been a proliferation of small parties in recent years, but most have fallen by the wayside, and the political system is increasingly dominated by the two main parties. General election results19901993199620002004% of voteNo. of seats% of voteNo. of seats% of voteNo. of seats% of voteNo. of seats% of voteNo. of seatsPanhellenic Socialist Movement (Pasok)38.612346.917041.516243.815840.6117New Democracy (ND)46.915039.311138.210842.712545.4165Communist Party of Greece (KKE)4.595.6115.5115.912Synaspismos10.3192.905.1103.263.36Democratic Socialist Movement (Dikki)4.492.702.20Political Spring (DA)4.9102.90--Others4.281.502.302.102.60Sources: Athens News Agency and Athens News.Main political figures Costas Karamanlis: The new prime minister, nephew of the founder of New Democracy (ND), was elected head of the party in 1997, when he was just 40 years old. He has been a member of parliament for the northern Greek capital of Thessaloniki since 1989 and has held many party posts, but had never held public office before becoming prime minister in 2004. Initially elected as a compromise candidate to paper over the many factions in New Democracy, he has through a combination of disciplinary measures and persuasion managed to build a relatively cohesive party, which has taken back into the fold a number of former dissidents and evolved a centre-right orientation. He stresses meritocracy in the public administration, but like all previous party leaders he has larded public enterprises and entities with party adherents and appointed many political advisers in ministries. George Papandreou: The new head of the Panhellenic Socialist Movement (Pasok) since the end of 2004 is the son of the party founder, Andreas Papandreou. Educated in the US and the UK, he is more sympathetic to Anglo-Saxon culture and western political and security institutions than many of his fellow politicians. MrPapandreou served in the ministries of education and foreign affairs before becoming foreign minister in 1999. He seeks to remould Pasok as a centrist camp open to both conservatives and leftistsa fact that he emphasised by appointing two former neo-liberals and two former leading communists to his state deputy list for the 2004 election. But his approach, based on issue-led politics, does not sit easily with old-style party members, who view the party as a source of both political and monetary patronage. He tried to stamp his personal mark on the party by passing over many old-guard figures in favour of new, young candidates (particularly women) for nation-wide local elections for prefectures and municipalities scheduled for October 2006. George Alogoskoufis: The new minister of economy and finance is a highly skilled economist, but he is also highly politicised, and this tends to colour the facts in his presentation of economic issues. He was the principal architect of the government's fiscal review that backfired and led to the Greek economy being put under surveillance under the excessive-deficit procedure of the EU's Stability and Growth Pact. The policy is generally considered to have been sound, but Mr Alogoskoufis's political handling of it has been characterised as naive. Nonetheless, the majority of the reforms being implemented by the ND government have emanated from his ministry. Dora Bakoyannis: The daughter of Constantine Mitsotakis, a former leader of ND, Ms Bakoyannis was the conservatives' shadow minister of foreign affairs until she stood down in 2002 to contest the mayorship of Athens, which she won in the second round against a former European Commissioner and member of Pasok. She has used the high profile of her mayoral position, particularly during the Athens 2004 Olympic Games, to build an extensive political machine. She was promoted to minister of foreign affairs in a February 2006 cabinet shuffle where she has handled herself with extreme skillparticularly in balancing Greeces bilateral interests with Turkey against its long-standing umbrella support for Cyprus. She is widely held to be an eventual challenger to MrKaramanlis for leadership of ND. Political Development Political life in the post-dictatorship period has been dominated by two parties, both of which were founded in 1974: the conservative New Democracy (ND) party, headed by Constantine Karamanlis, and the left-wing Panhellenic Socialist Movement (Pasok), founded by Andreas Papandreou. MrKaramanlis served two terms as prime minister before stepping up to the presidency in April 1980. Greece became a member of the European Community (now EU) in 1981. Although the country was ill-prepared both economically and administratively for European Community membership and initially failed to use European funds efficiently, membership did help to bolster Greece's fragile democracy. Important recent events January 2001: Greece officially joins economic and monetary union (EMU). The drachma is tied to the euro at Dr340.75:euro1, and the European Central Bank (ECB) assumes responsibility for Greece's monetary policy. January 2004: With the Panhellenic Socialist Movement (Pasok) trailing badly in opinion polls, the prime minister, Costas Simitis, stands aside as party leader in favour of George Papandreou (son of the party founder) and calls an early election for March 7th. March 2004: The centre-right New Democracy (ND) party wins the election by a margin of nearly 5percentage points and secures a 165-seat absolute majority in parliament. April 2004: The UN-sponsored Annan plan for the reunification of Cyprus is rejected in a referendum by as many as 76% of Greek Cypriot voters. February 2005: Following the revelation that the general government budget deficit rose in 2004 to 5.3% of GDP (since revised upwards to 6.9%), in breach of the 3% ceiling imposed by the EU's Stability and Growth Pact, the EU's Council of economy and finance ministers (Ecofin) places the Greek economy under surveillance and gives it two years to bring the deficit into line. March 2005: Karolos Papoulias, a founding member of Pasok and a former foreign minister, assumes office as Greece's new president for a five-year term on March 12th. October 2005: Greece backs opening of EU accession negotiations with Turkey. February 2006: Cabinet reshuffle. Dora Bakoyannis becomes minister of foreign affairs. Socialists hold power in the 1980s and most of the 1990s : MrPapandreou and his Pasok party won the general election in 1981 and formed Greece's first socialist government. Pasok's economic policy was characterised by income redistribution, efforts to establish a social security system with universal healthcare and pensions, and an expansion of the already large state sector. These policies were financed through heavy borrowing, and by the mid-1980s both the government finances and inflation were out of control. Following its re-election in 1985 Pasok sought EU balance-of-payments assistance, which required the party to implement an austerity programme. The resulting financial hardship, combined with high-level corruption, was responsible for the steady erosion of the government's popularity in the late 1980s and its election defeat in 1989. There were three general elections and two hung parliaments in the space of ten months during 1989-90. While the stalemate severely tried the constitutional order, it proved that there was no appetite in the polity for a return to non-democratic solutions such as military intervention. In April 1990 ND, under the leadership of Constantine Mitsotakis, secured an absolute majority of one. ND sought to re-establish fiscal balance, but the government was forced to resign in 1993, before the end of its four-year term, because of parliamentary defections. The electorate, dissatisfied with ND's liberal policies, re-elected Pasok in October 1993. This third Pasok government was divided between populists, who wanted to return to the free-spending style of the early 1980s, and reformers, who sought to meet the criteria that would permit Greece to join the EU's economic and monetary union (EMU). The division was compounded by a bitter leadership struggle to replace MrPapandreou, whose health was rapidly failing. In January 1996, after a period of government paralysis, Costas Simitis, a reformist and former economics minister, succeeded MrPapandreou. In September of the same year the new leader steered Pasok to a comfortable victory in the general election. The government's primary objective became EMU membership at the earliest possible date. After rejection in 1998, Greece became the 12th member of the euro area on January 1st 2001, just two years after the single currency's launch. Pasok remains in power after the 2000 general election: Although Pasok won the general election on April 9th 2000 by a narrow margin (gaining 43.8% of the vote, compared with 42.7% for ND), the Greek system of reinforced proportional representation gave the government an absolute majority of eight in the 300-seat parliament. In opinion polls Pasok, suffering from voter fatigue, trailed the opposition conservatives by up to 9percentage points. ND was successful in painting the socialists as concerned only with their own party interests and the perquisites of power, rather than the good of the public at large. In January 2004 a beleaguered MrSimitis sought to revitalise his party's fortunes by standing aside as Pasok leader in favour of the minister of foreign affairs, George Papandreou, son of the party founder. It was thought that the family name might just secure victory for the socialists in an early election called for March 7th. MrPapandreou's appointment briefly narrowed the conservatives' lead over the socialists to around 3 percentage points. However, in the end it was insufficient to sway the public, and ND, under Costas Karamanlis, the nephew of the eponymous founder of the party, won the election by a margin approaching 5 percentage points, giving it 165 seats in parliament, to 117 for Pasok. The Communist Party (KKE) took 12 seats, and the Left Coalition (Synaspismos) six, which would have been sufficient for a centre-left alliance to block the election by parliament of a new President of the Republic in 2005 (the government candidate must secure 180 votes) and force a fresh national election. However, MrKaramanlis avoided this possibility by nominating as president Karolos Papoulias, a founding member of Pasok and a former foreign minister. He was elected in February 2005 by 279 votes and assumed office for a five-year term on March 12th 2005. MrKaramanlis gathered about him a young cabinet team and promised to concentrate on a renewal of public life, which he claimed had become complacent, arrogant and corrupt under the long years of socialist rule. However, he has insisted that he will do this only through the introduction of "mild" policies that will not favour one social class over another. Mr Papandreou has been trying to transform Pasok from a rigid, hierarchical party to one based on a more open form of "participatory democracy", however, he has failed to convince the hard-line socialists and populists in his party of the value of such change and has yet to stamp his personal style on the party. As a consequence, Pasoks opposition has been erratic and sometimes ambiguous. Both parties appear to be pitching for the centre ground at the moment, with the result that political life in Greece is becoming more issue-led, rather than ideologically oriented. This is in keeping with the growing sense among the political class of participating in a larger European, rather than a purely national, context. International Relations and Defence All the political parties in Greece with the exception of the KKE are strong proponents of Greek membership of the EU, although some concerns have been expressed by centre-left factions about the rigours of the Stability and Growth Pact (SGP), which governs membership of the euro area. Drawing on its own experience, Greece sees economic prosperity as a motor for political stability, and thus has been a proponent of early entry into the enlarged EU for Romania and Bulgaria, both of which are scheduled to join the Union in 2007. Greece also promotes early entry for nations of the western Balkan states that have entered into a so-called Stabilisation and Association Process, and favours expansion of the EU to the east to include Russia and states such as Ukraine, Belarus andMoldova. Greece is the only EU member of the ten-nation South-east European Co-operation Process, a body pledged to promote regional initiatives in areas such as economic and energy co-operation. It is a founder member of the 12-nation Organisation of Black Sea Economic Co-operation (BSEC). The BSEC bank, which helps to promote trade in the region, is based in Thessaloniki. Greece was the instigator of the Balkan Forum, which holds biannual meetings at ministerial level on a fluid agenda of political issues. Its sessions tend to provide a forum for defusing differences. Strained relations with Turkey have dominated Greece's regional foreign policy. The main source of tension has been Cyprus. Large numbers of Greek troops were covertly stationed on the island from 1964 to 1967, and the Greek military junta sponsored a coup against the elected Greek Cypriot leadership in 1974. Turkey replied by invading and occupying the northern third of the island, where the Turkish Cypriots have created a self-declared autonomous state, the Turkish Republic of Northern Cyprus (TRNC). Turkey has stationed some 35,000 troops in the north. The TRNC is only recognised by Turkey; the rest of the international community recognises the Republic of Cyprus, the writ of which only runs in the southern sector of the island. Additionally, there are long-standing Greco-Turkish disputes over territorial waters, seabed rights, air space and flight control in the Aegean Sea. Turkey has also raised issues about the Greek fortification of eastern Aegean Islands that, under historical treaties were supposed to remain demilitarised, and about the sovereignty of 130 uninhabited islets that are not named in these treaties, which, in turn, impinges on the seabed and territorial waters issues). Ratification by the Greek parliament of the International Convention on the Law of the Sea, which gives Greece the right to extend its territorial waters to 12miles (19 km), caused the Turkish parliament to pass a resolution saying that if Greece were to extend its waters in the Aegean to 12 miles, then this would be a cause for war. In practice, Greece continues to observe a six-mile limit while reserving the right to extend it. In May 1999 the two nations embarked on a low-level process of rapprochement, which has led to the signing of a number of bilateral accords on a range of non-contentious issues, including immigration, terrorism, promotion and protection of investment, double taxation, trade, energy interconnections, road and rail links, culture, and the environment. At the beginning of 2002 the consultation process was elevated to a "dialogue" at the level of political directors of the respective foreign ministries, with a view to exploring mechanisms for the resolution of substantive bilateral differences in the Aegean. In March 2005 the defence committee of the Greek parliament dropped Turkey from the top of its list of threat perceptions for the first time in 30 years. Greece has adopted a "strategic" policy to promote Turkeys "European orientation" but, as relations between the two countries fluctuate, has made it clear that this is not unconditional or an open-ended commitment. Initially the country had stood in the way of Turkey's aspirations to join the EU because of the continuing occupation of northern Cyprus. However, at the Helsinki European Council meeting in December 1999 Greece agreed that the Turkish association agreement should be activated in exchange for an agreement that Cyprus would be included among the ten countries eligible for EU accession, irrespective of any prior settlement. When in December 2002 the EU accepted Cyprus as one of the ten states that would accede to the Union on May 1st 2004, the Council of Ministers expressed its "strong preference" for the island to enter as a united state. It urged the Greek Cypriot and Turkish Cypriot leaderships to conclude a settlement agreement before the ratification of the EU accession treaties on April 16th 2003, but efforts to reach a settlement ahead of that date were frustrated by the Turkish Cypriots. The Council of Ministers stipulated, therefore, that the application of the acquis communitaire (the body of EU law) should remain "suspended" in the northern territory until such time as there was an internationally recognised government that could exercise authority there. A fresh push to secure a bizonal settlement ahead of the May 1st 2004 entry deadline led to a procedure whereby the two community leaders would negotiate, followed by talks between the heads of government of Greece and Turkey. Any outstanding issues would be completed at the discretion of the UN secretary-general, Kofi Annan, and the final agreement would be put to separate referendums in the two communities on the island. The settlement plan drafted by Mr Annan was rejected by 76% of Greek Cypriot voters in a referendum held on April 24th 2004. Cyprus entered the EU as a divided island, with only the Greek Cypriot administration participating actively. Greek-Turkish relations have been cooling since mid-2005, particularly following the resurrection of disputes over territorial waters and airspace in the Aegean and over Turkey's refusal to recognise the (Greek Cypriot) government of Cyprus. Turkey has offered what can be considered a reasonable exchangeimplementing an additional protocol to its association agreement commitments to extend Turkey's 1995 customs union agreement to the new EU member states, including Cyprus, and the implementation of the protocol by opening Turkish air- and seaports to Greek Cypriot planes and vessels, in exchange for direct trade between northern Cyprus and the EU (which had been promised by the EU in mid-2004 after the referendums on the Annan plan). The Greek Cypriots have blocked the EU's direct trade measures because they consider it to constitute de facto recognition of the Turkish Republic of Northern Cyprus (TRNC). The EU is now saying that the two issues cannot be linked, but when the proposal was put forward the Commission, the US and the UK all praised Turkeys initiative. Since 1991, when Macedonia emerged from the former Socialist Federal Republic of Yugoslavia, Greece has objected to the name adopted in the constitutionthe Republic of Macedoniaclaiming that it represents a territorial claim to the Greek region of Macedonia. Macedonia agreed to join the UN in 1992 as the Former Yugoslav Republic of Macedonia, or the FYROM, and is known internationally by that name, although in practice foreign diplomats always refer to the country as Macedonia. In 1995 the UN brokered an interim agreement that provided for means of diplomatic communication, and relations between the two countries have since improved, although the dispute remains unresolved. (The six-year interim accord ended in 2002, but a clause allowing its extension, provided neither side objected, then automatically came into force.) The agreement provides for the issuing of visas and allows the development of trade and crossborder investment, and Greek business interests have become major players in the FYROM energy, banking and telecommunications marketsstate-owned Hellenic Petroleum has acquired the only refinery in the FYROM and constructed a pipeline from Thessaloniki to service it. In April 2005 the Greek government backed down from its long-held position that it would accept no name for the country that included the term Macedonia, and proposed Republika Makedonija-Skopje, provided that it remained untranslated. This was rejected by the government in Skopje, and the dispute remains unresolved. Relations with Albania have at times been strained since the restoration of democracy, because of a large and vocal ethnic Greek minority in southern Albania and the presence of at least half a million Albanian economic migrants in Greece. Relations with the current Albanian government are correct: Greece has granted substantial economic aid and Greek businessmen are active in the country, though less so than they had originally hoped as a result of continuing bureaucratic constraints. Relations with Bulgaria, which shares the cultural traditions of Orthodox Christianity, have traditionally been good. Greek firms have substantial investments in the country, particularly companies in the textiles industry, which have transferred labour-intensive aspects of production there to take advantage of lower labour costs. The prospect of Bulgaria and Romania joining the EU in 2007 has led Greek businesses to intensify their investments in both countries. Greek banks and telecoms companies have a major presence in both countries and the Greek Public Power Corporation has received court approval to acquire an electricity-generating station in Bulgaria. Greece has been a member of NATO since 1952. Historically, Greece's armed forces have consisted of conscripts with a professional officer corps. The last Pasok government introduced measures to cut the number of conscripts to below 90,000 and to reduce the time of service to one year. The number of active personnel is constantly in decline, but reserve service is until age 50 and there are some 325,000 reservists. Greece withdrew from NATO's integrated command and control structure after it failed to intervene to prevent the Turkish invasion of Cyprus. Nominally Greece reintegrated in 1981, but there have been continued disputes with Turkey regarding responsibilities for airspace over the Aegean. A compromise deal has transferred control to a US commander based inItaly. Greece has units attached to the NATO-led peacekeeping forces in Afghanistan and Kosovo. It declined to provide troops for the US-led coalition force that invaded Iraq, but it allowed US aircraft to overfly its territory and did nothing to stand in the way of the US and some of its allies using the large American naval facility at Souda Bay in Crete for the transshipment of equipment and resupply of materiel. Greece has been a proponent of the EU's European Security and Defence Policy (ESDP) and has pledged a mechanised brigade plus air and naval resources to the Rapid Reaction Force (RRF). Copyright 2007 Economist Intelligence Unit [ Back To TMCnet.com's Homepage ]