Greece – one month on

It is now one month since Syriza came to power in the Greek general election. Much has been said across Europe, many meetings held but little has changed.

Syriza said, both ahead of and immediately after the election, that they would immediately and unilaterally throw out the Troika (the term for the EC, ECB and IMF group that oversaw Greece’s adherence to the bailout conditions imposed) to regain sovereignty over economic policy and end austerity. They said that they would demand a haircut on the amount of debt owed and that the rest of Europe would agree to this because it was (a) fair and just and (b) Europe would be scared that Greece might pull out of the euro and set off a chain reaction amongst other members that would call into question the very existence of the single currency.

Over the last few days Syriza has backed down from all of these demands, with apparently very little gained in return. Europe has stated very clearly that any write-down in the value of the outstanding debt is unacceptable to them, and Europe has continued to demand that the same trio of institutions (though now called the institutions rather than the Troika) determine whether Greece is complying with its obligations under the original bailout agreement. Also rather than anything happening immediately as Syriza demanded further discussions will take place over the next four months and conclude just before Greece is required to repay the next tranche of its debt.

It seems difficult to argue anything but that Syriza has failed miserably to deliver what it had promised the Greek voters – and indeed the risk now is that Syriza is unable to get its own MPs to give parliamentary approval to what it has agreed with Europe – which would lead to a new crisis.

With a finance minister who was formerly a professor of game theory, everyone was interested to see the negotiating techniques that Syriza adopted. At the time, and even more so with hindsight, they do not seem to have been very smart. The first acts of Tsipras and Varoufakis (the prime minister and finance minister) seemed designed to upset and offend the Germans, which may have good for domestic politics, but not ideal for bringing on board the key decision-maker in reaching agreement with Europe. They also made significant concessions very early – within a few days of coming to power, Tsipras was saying that Greece intended to repay every euro of its debts. Syriza’s maximum leverage was always likely to be immediately after the election, when “democracy” was on their side – by allowing discussion to go on for another four months they will lose that benefit. Finally it became clear as time went on that the “disaster” scenario of Greece pulling out of the euro, was something that Germany was quite prepared to live with (indeed many Germans are actively campaigning for it) whereas Syriza did not have a mandate to allow that , given that 70% of Greeks want to remain in the euro.

By contrast, Europe, led by Germany but strongly encouraged by both other Northern countries such as Finland who share the German approach to economic discipline, and by Southern countries such as Spain and Portugal, who have been through similar austerity programmes to Greece without (much) complaint and did not see why Greece should get any special treatment, played their hand in a very robust style. Schauble, the German finance minister seemed to revel in the role of “euro-enforcer”, and has insisted on Greece backing down on almost every substantive element of their demands.

The lessons from the last month seem to be (i) when going into a negotiation you need a credible fall-back position if you can’t get what you want – Syriza rather put a gun to their own head and threatened to shoot, (ii) Syriza, by conceding externally in Europe, may well have lost credibility internally, disappointing both many of their own party members and many Greeks who voted for them and (iii) Europe does not recognise democracy as an appropriate reason to go against past agreements and the rule of law (Juncker has made this point explicitly) – it should now be abundantly clear that being a part of the euro means a substantial loss of sovereignty for a nation, especially if they have a weak financial system.

Not much has changed in the last month. Greece is still stuck with debt it will never be able to repay, the Greek government has almost no say in how its economy is to be run, and the European political class have asserted their right to ignore the results of democracy in their quest to maintain the structurally-flawed single currency. This is not a long-term equilibrium – there are more crises to come.

The Greek New Year

While Europe relaxed during their Christmas holidays, Greek MPs were unable to elect a new President and a general election has been called for January 25. The opinion polls show Syriza the radical left party with a 3% lead. The Greek parliament has 300 MPs, 250 of whom are elected on a proportional representation basis, but the other 50 are awarded to the party which wins the greatest share of the vote.

In recent weeks Syriza have been toning down their aggressive rhetoric about unilaterally defaulting on Greek government debt, possibly in a bid to gain more moderate votes. In addition if the current polls are correct, Syriza will not achieve a majority of 151 MPs and will thus need to enter into a coalition with a more moderate party. Markets have thus become a little more hopeful another Greek financial crisis will be avoided.

Syriza’s economic policy has 3 strands:

  • A restructuring or forgiveness of much of the €370bn debt owed by the Greek government
  • An end to the austerity measures,  an end to the Troika (the IMF, ECB and EU) oversight of Greek economic policy and increases in wages, pensions and benefits throughout Greece, and

3)      Remaining in the euro

The first could be easily conceded on pragmatic grounds. 80% of the debt is owed to the Troika and it is generally accepted that most of it is unlikely to ever be repaid. However politically, any formal restructuring agreement would set a precedent that Ireland and Portugal might be keen to emulate, and thus be unappealing to the Troika (and Germany in particular who have effective veto power here).

The second and third demands are, however,  not acceptable (to the Troika) as a pair. If Greece wishes to remain in the euro (and polls show over 70% of Greeks wish to stay in the euro) then limits to government spending and deficits are part of what is required of all countries.

In recent days senior German politicians have made it clear that they would not be unhappy if Greece decides to leave the euro. Documents from the 2010-11 crisis that have recently become public show that many in Germany would have been quite happy not to rescue Greece and force it out of the euro then, but it was Angela Merkel that ultimately decided the contagion risks of a Greek exit were too high. This time around the contagion risks are generally believed to be very much lower and that the Eurozone could let Greece go without a wider crisis.

So the end of January and early February are likely to see negotiations to form a Syriza-led government and the end of the March is the deadline by which a new agreement with the Troika over Greek austerity is due. Either Syriza or the Germans will have to blink first!