In early September, after eleven months in power, Prime Minister George Papandreou of the centre-left Pan-Hellenic Socialist Movement (PASOK) carried out a wide-reaching cabinet reshuffle, aimed at strengthening the effectiveness of the core team of ministers and deputies responsible for dealing with the country’s economic and financial policies and ensuring that Greece meets its economic targets. Portfolios were shifted, new ministries were created and the number of cabinet members was increased. Importantly, George Papakonstantinou, a key figure in the government’s efforts to tackle its debt and deficit problems and enforce the tough austerity measures set out in the EU-IMF loan agreement, has remained as Finance Minister. However, the Minister of Economy was removed and the department was split into a Regional Development and Competitiveness and a Maritime Affairs Ministry. A particularly significant development was the creation of a new portfolio of Foreign Investments tasked with attracting investment, which the government expects to help the economy return to growth.  

Indeed, the country faces a second year of recession as the government attempts to tame a budget shortfall of 13.6% of GDP. The Greek economy continued to contract for a sixth consecutive quarter, as real GDP declined by 3.7% year on year (y/y) in Q2 2010 (and by 1.8% on a quarterly basis). This is mainly due to a reduction in gross fixed capital formation by 18.6% y/y, as firms, especially in the construction sector, slashed investment projects and dismissed workers to cope with the downturn. A high unemployment rate, coupled with wage cuts and tax hikes, has further eroded household income, resulting in a 4.2% y/y fall in private consumption. Government consumption also declined, albeit at a slower pace than in the previous quarter. The fall in domestic demand affected imports negatively, dropping by 13.5% y/y, while exports also contracted (by 5.0%) despite stronger external demand.  

Against this backdrop, the government is considering the introduction of measures aimed at supporting growth and creating jobs, such as the use of tax incentives for large-scale investments. However, these may not yield the expected results: possible new tax hikes, as of January 2011, will dampen recovery prospects. The IMF has decided to send two permanent officials to the country to monitor the progress of tax collection and a public spending crackdown, amid concerns that a lack of progress in boosting revenues might lead to the need for new austerity measures, which could fuel social unrest. The government is already facing a fresh wave of strikes against its reforms: a new three-week protest by truck drivers against the liberalisation of the road haulage sector crippled domestic trade and exports, resulting in an estimated EUR1.5bn in losses to the business sector.