Once Europe’s Headache, Greece Finds Its Feet

Nobody frets about Grexit any more in Greece’s once-again bustling capital city. In streets that were previously blighted by closed storefronts, locals complain about rising rents and the spread of Airbnb apartments.

Greece still has a long way to go to heal from the deepest slump suffered by any developed economy since the 1930s. Gross domestic product remains 24% lower than in 2008. Greece is the second-poorest nation in the European Union, ahead of only Bulgaria in per capita GDP adjusted for purchasing power, according to the World Bank.

Nonetheless, the Greek economy grew by nearly 6% last year. Greek industries are learning how to export more, and foreign investors are finding Greece a more welcoming place. Fewer young people are emigrating in search of better opportunities.

“There has been significant progress, but it’s neither complete nor irreversible," said Titan Cement Chairman Dimitri Papalexopoulos, who heads Greece’s main business federation.

Years of painful overhauls during Greece’s international bailout programs in 2010-18 and further measures under the current government have made the country an easier place to invest and do business, said Mr. Papalexopoulos. But parts of the public sector remain unchanged, he said, notably the tortuously slow judicial system, while taxes on labor are still onerous, encouraging tax evasion.

A structurally sounder Greek economy would be the biggest proof that the eurozone has fully overcome the calamitous debt crisis of the early 2010s.

Greece’s national debt, at around 170% of GDP, remains the highest in the EU. The country is still striving to shed the junk rating on its government bonds. But most of Greece’s debt is owed to eurozone authorities, which have given Athens decades to repay its bailout loans with minimal interest.

Growth and inflation are eating away at the debt-to-GDP ratio. Greece’s center-right government is touting that, and other positive economic data, as it campaigns for national elections on May 21. Prime Minister Kyriakos Mitsotakis and his New Democracy party are expected to come in first but fall short of a majority in Parliament, likely requiring another national vote in July.

The government attributes much of the economic improvement to overhauls it has enacted since it was elected four years ago. “In 2019, voters said taxes are too high, there is too much red tape and not enough jobs," said Alex Patelis, chief economic adviser to the prime minister. “Four years later, it is a different picture."

Political opponents praise the government’s progress in digitizing everyday interactions with the public sector, from paying taxes to applying for business permits. But critics say many other measures have been incremental, insufficiently implemented and oversold by a government strong on presentation skills but often shying away from fights with vested interests.

“Most of the reforms have not been confrontational," said Miranda Xafa, an economist and former government adviser. Digitizing government services has made many civil servants redundant, but the government promised no job cuts, she said.

Business people say endless court entanglements remain a typical Greek experience.

A large wind-farm project in northern Greece, partly financed by a U.S. investment fund, got its environmental license in 2014. Local farmers and hunters filed suit against the investment, and it reached Greece’s highest administrative court, which rejected the challenge in 2019. The energy project was scaled down and received a new environmental license two years later. The license was contested again, this time by the local municipality. A court date is set for this November, but a postponement is likely, said a person involved in the case.

The employers’ federation is also unhappy that the government is applying digital technology to Greek labor rules, such as the notification process for overtime work, without overhauling those rules. “They are digitizing a bad process," said Mr. Papalexopoulos. “Let’s revise the processes before making them digital. This is the type of deeper reform that hasn’t been done enough yet."

The government says it wants to tackle judicial overhauls in a second term. Mr. Mitsotakis vowed to overhaul state-owned enterprises after a train collision in February in northern Greece killed 57 people.

The crash exposed how incompetence, delayed modernization and political patronage continue to blight swaths of Greece’s public sector. An outpouring of anger over the tragedy dented the government’s support and prompted Mr. Mitsotakis to delay elections.

Greece is enjoying a boost from the EU’s postpandemic recovery funds, which were created especially to help Europe’s economically fragile south to bounce back. Current growth and government largess could be difficult to sustain when the EU funds end.

Some of the best economic news has come from trade, which has risen strongly as a share of Greek GDP, reflecting an economy that has opened up more to international competition.

Tourism is rebounding powerfully from the pandemic, while other sectors such as shipping and oil refineries are thriving. Greek shipping magnates have profited in part from transporting Russian oil, which many other tankers won’t touch.

Once-tiny manufacturing exports are also rising. But Greece’s recovery is driving up imports even faster, leading to a gaping trade deficit. If sustained, that shortfall could revive reliance on foreign borrowing, a problem that plagued Greece before its crisis.

The government blames the trade deficit on last year’s jump in energy prices, but some economists say there is more to it. “There is a very heavy reliance on imported goods," said Ms. Xafa. “The productive base in Greece is not broad enough that increases in demand can be satisfied through domestic sources."

Greece’s small but growing technology sector is another bright spot. Venture capital and EU funding is fueling a startup scene that barely existed a decade ago and now has a market capitalization of close to $10 billion, said Marco Veremis, a tech-sector investor based in Athens.

Foreign investment in Greece is rising strongly, albeit from a low level, reaching the equivalent of around $7.6 billion last year.

Google, Amazon.com and Microsoft have opened cloud-computing or data centers in Greece. The pharmaceutical company Pfizer has opened a research center in the northern city of Thessaloniki, drawn by Greece’s geographical location between East and West, an abundance of well-educated people, relatively low wage costs and fiscal incentives.

The facility, which applies digital technology to the process of drug discovery and development, was supposed to hire 200 staff, but will soon reach 500, said Nico Gariboldi, the center’s head.

Some of Pfizer’s hires are Greeks who emigrated during the debt crisis, when the net brain drain for the country of 10.5 million people was around 250,000, mostly highly qualified workers.

Multinational companies are investing not because Greece is cheap, but because it is stable, according to Mr. Patelis, the adviser to the prime minister. “Which is why it was so important for Greece to remain in the euro," he said.

Write to Marcus Walker at Marcus.Walker@wsj.com