He will also have to overhaul a pension system which is expected to fail within 15 years due to an increasingly large, ageing population.
However, analysts say the government’s perceived poor response to a wave of forest fires that killed 65 people and scandals have weakened his power in parliament and may complicate his attempts to tackle the economy.
“It’s not a very comfortable majority, which makes it a little difficult but they can start to tackle the pension system,” said Theodor Schoenebeck, an economist at Deutsche Bank.
Al Jazeera’s Athens correspondent Barnaby Phillips said: “Most Greeks are not overwhelmed with this government, but [they] did feel it was worth another chance.”
The embattled education minister, Marietta Giannakou, who led planned changes in the education system that sparked months-long demonstrations, failed to retain her seat in parliament.
|The campaign was dominated by recent
forest fires that ravaged the country [Reuters]
Karamanlis has cut budget deficits and created 200,000 jobs, but unemployment remains above the EU average.
He said: “In the new four-year term, we will continue with steady steps for a stronger economy and to fight poverty.
“To create more opportunities for young people, to strengthen and expand the social state.”
George Papandreou, the opposition socialist PASOK party leader, also lost pace to smaller groups, failing to capitalise on the government’s problems.
After the poor PASOK performance he is expected to come under pressure over his leadership of the party.
PASOK won just over 38 per cent of the vote and 102 seats in parliament, compared with 117 seats in 2004.
The far-right LAOS. party won 3.8 per cent of the vote, gaining 10 seats, the first far-right party to make it to parliament since military rule in Greece ended in 1974.
PASOK ruled Greece for most of the 1980s and 1990s, but lost elections to Karamanlis’s party in 2004.