Our Opinion: 2015
The Greek dilemna
I have been a regular visitor to Athens for many years, but have never seen congestion like that on this visit. Whichever direction I want to travel involves seemingly hours stuck in traffic jams. Either signs of a definite recovery, or Athenians taking advantage of the significant fall in fuel prices. We’ll see.
In eight days, Greece goes to the polls in its first General Election in two and a half years. And the result will be crucial. After six years of recession, five under the guidance of the hated “troika” (the European Commission, the European Central Bank and the IMF), Greece’s future in the euro is again in question. At the last election, the far left Syriza party seemed determined to lead Greece out of the single currency. European leaders knew a managed exit would be impossible so did all it could to fund Greece’s debt and ensure support for the EU remained.
We now appear to have a complete reversal of the situation. Syriza’s leader, Alexis Tsipras, has worked hard to soften his image. A few months ago, he attended the annual Ambrosetti Forum on the shores of Lake Como, talking about the values of European integration and the importance of the Euro. And last week, German officials leaked to Der Spiegel their assessment that a Grexit would not only now be bearable but will actually make the Euro stronger.
Would a Grexit now simply mean a change in currency in a county which represents just 2% of Euro-zone GDP? Sadly not. A Grexit would still shatter the illusion that membership of the currency is irreversible, opening the door to speculative attacks on other euro members.
Greeks have been worn down by years of wage cuts and tax increases and they have flocked to Syriza, which is promising to write down some of the national debt and roll back austerity. European officials had hoped to avoid a Syriza-led government. But it should be no surprise if a country that has seen a 25% fall in output, unemployment at 26% and over one-third of the population at risk of poverty rejected those who have overseen such misery.
That puts the country on a collision course with the ‘troika’ who have kept Greece afloat with bailout loans since 2010. Syriza (which polls suggest likely to win although, perhaps, needing coalition partners) tells voters it will end the era of austerity, while assuring German taxpayers that it seeks no quarrel with them.
Tsipras promises tax cuts and a public-sector hiring spree, and a slashing of Greece’s debt load, which stands at over 170% of GDP. Such pledges seem at odds with those made by Greek governments in exchange for the bail-outs that have kept Greece in the single currency. Greek bond yields have spiked, and there are worrying signs of deposit outflows from banks.
Nobody really wants “Grexit”, least of all Greeks: 74% say they want to stick with the euro. Tsipras has surrounded himself with economists who profess a willingness to find a ‘negotiated solution’ with the country’s creditors. However, whilst the party’s leaders may well be keen to have a more mature approach in Government than in opposition, the party’s ideology is hostile to the market economy and the reforms that Greece has been implementing.
Bloomberg reported yesterday that economists are confident of Greece getting debt relief, whoever wins. It concludes that there is just a 15% chance of Greece leaving the 19-nation currency union.
Tsipras’s policies “are unlikely to be accepted by the troika of international lenders, despite Syriza’s position having moved to the center in recent times,” said Diego Iscaro, an economist at IHS Global Insight in London. “But it would not be the first party to become more pragmatic once in power.” European officials, including Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem, suggested this week more could be done to ease Greece’s debt burden, the largest in the euro zone at about 180% of gross domestic product.
However, Danae Kyriakopoulou at the Center for Economics and Business Research in London believes that “debt relief is unlikely given the moral hazard issues associated with it and the potential demands for debt relief elsewhere in Europe.” She said. “I sincerely hope to be proven wrong as it is our view that some is necessary for Greece to achieve a sustainable route to recovery.”
An exit would be painful and costly. But unlike in 2012, when Syriza narrowly lost an election to the centre-right New Democracy party, the Germans and others hint that this time the euro zone is reasonably well placed to cope with a Greek departure. European officials insist they will countenance no reversal of Greece’s main fiscal and structural reforms, partly for fear of emboldening anti-austerians elsewhere. Nor will they accept another debt write-off.
Perhaps a classic European fudge is on the way. “Compromise is not as hard as it looks,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “Europe can give.”
Assuming a Syriza win (outright or in coalition) exciting times are upon us. Tsipras must sell a deal to the more militant members of his party, some of whom were never convinced by the euro. Syriza’s leaders are inexperienced negotiators and they have had little contact with their creditors. Crucuially, the latest phase of Greece’s euro-zone bail-out expires at the end of February, and various bond repayments are due soon afterwards.
There won’t be much time for discussion. Either Europe will have to give, or a Grexit will be clearly back on the agenda. Whilst Merkel may have come round to that idea, the markets have not. But if a Syriza victory gives Greeks the belief that they have, at long last, a small influence on their own destiny – rather than the Troika having all the control – that could go some way to repairing the damage of the past few years which is still so visible and raw.
Although the traffic jams will still need fixing.