Fears of ‘Grexit’ Are Still Greatly Exaggerated

The victory of the radical left-wing Syriza in the Greek general election has been widely interpreted in Europe as a popular backlash against the economic austerity imposed on the country from outside. Germany, as the dominant power in the eurozone, and the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund, are seen as the losers. The reality is more complex, as the new government will inevitably have to temper populist policies with pragmatic accommodation of Greece’s creditors.

Alexis Tsipras, the new prime minister, has aroused great popular expectations − at home and abroad − but he will have his work cut out to unite his inexperienced government and meet the disparate demands of his supporters. This was not so much a vote against the eurozone, to which a large majority of Greeks still wish to belong, as a vote of no confidence in the Greek political and business establishment. It was a cry of frustration at the failure of the two dominant parties of the past four decades – Pasok on the left and New Democracy on the right – to root out corruption and nepotism, not least in their own ranks.

Blaming the austerity policies of the eurozone on Germany is also a gross oversimplification, although it was widely parroted on Greek election platforms. The harsh combination of fiscal discipline and structural reforms that was imposed on Athens was the minimum required by all the eurozone finance ministers. In exchange, they approved two massive debt relief packages in 2010 and 2012, totalling €226.7 billion.

The extent to which the Greek vote was a cry for reform, as much as for relief from austerity, may make it slightly easier to negotiate a compromise between Athens and the 18 other countries that share the euro as a common currency. But the fact that Germany is not the only eurozone country insisting that the new Greek government stick by the commitments of its predecessors is likely to make it more difficult.

There is very little time to negotiate an extension to the current Greek programme before it runs out on 28 February. Tsipras is demanding radical changes − he sees himself on a crusade to liberate Europe from austerity, and free Greece from half of its outstanding debt burden. But that is not going to happen, certainly not in a very few weeks.

Both in Brussels and in the financial markets, there has been a feeling recently that Syriza would prove more pragmatic than its propaganda suggests: the closer they got to power, the more they would tone down their demands. But first indications from Athens are not so encouraging.

Tsipras’s choice of the right-wing nationalist Independent Greeks (Anel) as his coalition partner was not what the rest of the eurozone wanted. They thought he would opt for the moderate pro-European To Potami group. (Tsipras suggested as much on his last trip to Brussels.) Instead, he has chosen a party with which he has nothing in common except visceral hostility to the eurozone rescue programme, and blaming Berlin.

The alliance with Anel also suggests that Athens will not be launching any original or daring foreign policy initiatives in the near future. Tsipras’s chose Cyprus for his first trip abroad, not Berlin or Brussels. It is exactly what all Greek prime ministers have done before him, entirely in line with tradition.

The first ambassador to be received after he was sworn in to office was from Russia – and the first action of the new government was to protest against an EU warning about Moscow’s latest intervention in Ukraine. There is little hope of any initiative to resolve the dispute with the Former Yugoslav Republic of Macedonia (FYROM) over its name, or of overtures to ease relations with neighbouring Turkey, as long as Anel’s Panos Kammenos is defence minister.

Tsipras’s first priority must be domestic: a social welfare package to deliver on election promises, with food and transport subsidies for the poorest, restoring the minimum wage, and boosting the lowest pensions. He has also promised to tackle tax evasion and corruption, and clamp down on the ‘oligarchs’ who dominate the economy and the media.

He can afford a gesture on welfare spending because the defeated Greek government had created a primary budget surplus before being ejected by the voters. But the key to getting any better deal out of Brussels will be his readiness to pursue more reform. Clamping down on tax evasion and corruption are steps in the right direction, but they are not enough to overhaul the system. Other measures favoured by the troika – including continued privatization and shrinking the bloated public payroll – are likely to be unpopular with his left-wing supporters.

There lies the rub. There will be no new debt deal without clear conditionality – but the very concept of conditionality is precisely what Greek voters sought to reject.

As for the idea of outright debt forgiveness, it is likely to fall foul of many more eurozone finance ministers than just Wolfgang Schäuble of Germany. Countries with a lower per capita income than Greece, such as Latvia and Slovakia, have contributed to the Greek bail-out, and pushed through their own drastic fiscal adjustment before joining the euro. They are utterly opposed to writing off their taxpayers’ money to help a country that has failed to fulfil its reform commitments after joining.

Greece’s northern creditors, such as Finland and the Netherlands, are acutely aware that a debt write-off could encourage right-wing populists in their own countries, while encouraging voters in the crisis-hit countries to put left-wing populists into power so they can get the same deal. Neither the Spanish nor the Irish government will want to be over-generous to Syriza, for fear of boosting support for their own populist opponents − Podemos, the anti-austerity party in Spain, is greatly encouraged by the election of Syriza, as is Sinn Fein in Ireland.

So for all the media hype about the Syriza victory being a game-changer in the crisis-hit eurozone, the reality is likely to be another hard-fought compromise between fiscal disciplinarians and debtors. The alternative of Greek debt default and exit from the eurozone is too awful for either side to contemplate.

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