Will the new Greek government get what it wants?
Since its inception in 1993 with the signing of the Maastricht Treaty, the European Union has been on the verge of disintegration. Crisis after crisis has rocked the organization, including several close calls on elections by member-states to join, several threatened pullouts by Great Britain, and most recently, a sovereign debt crisis along the southern periphery that could have easily destroyed the basis for an economic union.
Stepping forward in this crisis – the result of the financial meltdown in 2008 and massive overspending by member-states – have been three entities, known as "the troika," that have engineered bailouts of sovereign debt in Portugal, Spain, Ireland, Cyprus, and Greece. The European Central Bank, the International Monetary Fund, and the executive body of the EU, the European Commission, imposed strict austerity measures on endangered states that have destroyed jobs, pensions, and economic activity. Since the bailout, the Greek GDP has shrunk by 23%, and unemployment is at a catastrophic 25%, with 50% of young people without jobs.
Spain, Portugal, Ireland, and Cyprus have all been recovering slowly over the last four years since the bailout. But Greece's economy has stubbornly refused to grow, and the bailout involving $260 billion has done little to lower the debt. Percent of debt to GDP grew from 145% in 2012 to 173% in 2014. It's clear that the austerity measures imposed by the troika – including a bondholder "haircut" that saw bond values drop by more than 50% – have simply not worked.
This, then, is a thumbnail sketch of the recent past and explains why the Greek voter took a flyer and elected the party of a 40-year-old former communist and Che-admirer who wants to radically transform the Greek economy and society. (Where have we heard that before?)
Alexis Tsipras, who heads up the radical socialist party Syriza, has promised to end austerity in the budget, massively increase spending, seek debt forgiveness from the EU, and renationalize a big chunk of the economy. The Daily Mail ticks off Tsipras's wish list:
- A major renegotiation of Greece's debts and deep cuts in repayments on its £185-billion international bailout
- Writing off the bank debts of people who can't afford to pay – a move some experts fear could result in a run on lenders today
- Heavy new taxes on the rich including wealth taxes, new levies on luxury goods and an end to tax breaks for Greek shipping magnates
- A massive job creation scheme to tackle Greece's 25 per cent unemployment rate, and a 50 per cent increase in the minimum wage
- Deep cuts in defence spending and possible withdrawal from Nato
Middle-class Athenians can be found rummaging in bins. Farmers are bringing supplies to their urban cousins. On cold nights, a pall of woodsmoke rises, because people can no longer pay heating bills.
Syriza airily promises to stop all this. It says it will increase pensions, hike the minimum wage, expand healthcare, give free electricity to 300,000 households and renationalise a chunk of the economy. Oh, and it expects overseas creditors to offer Greece substantially better terms while it does all this. In normal times, and in a normal country, Syriza would be a joke party on the furthest fringes of the ultra-Left.
It is a coalition of Trotskyists, Maoists, eco-protesters and Occupy types. Mr Tsipras has only recently removed the Che Guevara poster from his office (his son carries the name 'Ernesto' in honour of that bloodthirsty South American revolutionary).
But these are not normal times. Many Greeks have switched directly to Syriza from the Centre-Right out of sheer despair.
And Mr Tsipras himself does not share his countrymen's emotional attachment to the euro. If forced to choose, he would pick the drachma over more austerity.
Therein lies the dilemma for EU policymakers. A Greek exit from the euro – Grexit – would be destabilizing in the extreme. But for Greece, it may make sense. Paying back all that debt in near worthless drachmas would set the staqe for an eventual recovery by the Greek economy. Of course, in the meantime, people's savings would be wiped out as their euros would be converted at unrealistic rates to nearly worthless drachmas. The banks might fall, contracts denominated in euros would be void, and no one in Europe would want to sell much of anything to Greece if he were to be paid in a currency that would be virtually worthless in international financial markets.
Reuters reports that the EU may be open to debt restructuring for Greece, but debt forgiveness is out of the question:
Europe showed a willingness on Monday to give Athens more time to pay back its debts, but little sign that it would yield to a new Greek government's demands of debt forgiveness.
European Union leaders and policymakers responded to Greek anti-bailout party Syriza's election victory on Sunday with warnings that a debt restructuring for Greece would send the wrong message to other euro zone members.
Euro zone finance ministers gather in Brussels on Monday afternoon to consider how to deal with Greece after the change of government, especially given that the existing Greek bailout programme expires on February 28.
The euro fell to an 11-year low as Syriza's victory set Athens on collision course with international lenders and potentially threatened its place in the single currency.
Without a bailout plan Athens will not be eligible for the European Central Bank's plan of government bond purchases and will have problems financing itself on the market. If Greece refuses to service its debt owed to the euro zone, private investors are unlikely to lend to it either, officials said.
Euro zone finance ministers are likely to signal they could extend the current bailout for Athens to give the new government time to negotiate economic policy with international lenders and talk about more time to pay back what Greece owes them.
If that sounds like the EU kicking the Greek can down the road, that's because that's exactly what is happening. It is the one thing that the EU does spectacularly well: put off decisions that should be made today until tomorrow. They've been doing it for more than 20 years, and it seems to have worked so far.
This is why despite the crisis, the EU will find a way to survive. Greece will remain in the eurozone, the Germans will grumble about subsidizing someone else's welfare state but pony up the cash to keep Greece afloat, the Greek people will merrily go on a spending spree – and the chances are pretty good we'll have to do this all over again in a couple of years.
In the meantime, the EU can pretend that things are going well, and the "European Project" is thriving.