It’s official: Syriza, the Greek anti-austerity leftist party, has won the general election. With 98pc of the votes counted it is looks to have taken 149 out of 300 seats, just two short of an overall majority but still in a very strong position. Syriza is pro-EU but anti-austerity – so will soon face a confrontation with the Troika (the European Commission, the European Central Bank and the International Monetary Fund). Germany has indicated that it’s less worried about Greece leaving the EU, so won’t bend over backwards to accommodate demands. The brinkmanship will now begin.
1. Background – the Greek economy
Over the last four years Greece has suffered from a depression comparable to 1930s America, resulting in widespread discontent and national suffering. Unemployment, now at just over 25 per cent, has reached highs of 30 per cent, while youth unemployment is shockingly above 50 per cent. The country has the largest debt in the EU, measuring 177 per cent of GDP. Servicing that debt has been, by far, the largest drain on the economy.
Compounding these issues were the ludicrously low retirement ages for public sector workers – civil servants employed before 1992 could retire on 80 per cent of their final salary after 35 years’ service, if they had reached 58. A Greek workforce of approximately 2.7 million is, therefore, paying for approximately the same number of retirees. As this is clearly unsustainable, Greece’s creditors have insisted that pensions be pared back.
This is just one of the austerity measures Greece has been struggling with. Germany, the main provider of Athens’ $240 billion worth of financing, has insisted upon unpopular reforms, especially to the pensions and public sector system. This has resulted in almost universal consternation in Greece, hence the desire for change. And tonight’s vote.
2. Yesterday’s election – and why Syriza wants to stay in the EU
Since the Greek parliament failed to elect a new president at the end of December, the parliament was dissolved and a snap election called. Syriza, under Alexis Tsipras, had a constant lead in the polls. The ex-prime minister of Greece, Antonis Samaras, warned on 2 January that a victory for Syriza would inevitably mean a default and exit from the Eurozone. But Tsipras has denied such a claim, telling Greek weekly Realnews that
‘It’s clear from any point of view that the subject of Greece leaving the euro simply does not exist’.
Alongside a poll last week that found that 74 per cent of Greeks want to remain in the single currency, it seems that there is no real appetite to leave the Eurozone.
3. But Germany is more relaxed about a ‘Grexit’
Despite this, Germany has been accused of trying covertly to influence the results of the election by reporting that Merkel is prepared to accept Greek exit if Syriza win. Under Greek law, however, despite the winning party gaining a fifty seat bonus, it had looked unlikely Syriza will gain an outright majority. They have come closer now than almost any forecaster predicted.
4. It’s now a question of how far Germany will budge.
With Syriza victorious, there will undoubtedly be anxiety regarding its ability and willingness to negotiate with Europe and vice versa. (The Euro has dropped to an 11-year low against the dollar this morning). However, despite Syriza’s flirtation with the idea of Grexit in 2012, it has since adopted a more centrist stance with John Milios, its chief economist, claiming that ‘everything we will do is in the context of staying in the Eurozone.’ They now favour renegotiation with Euro partners that would relax austerity policies and ease debt terms. But how much would Germany be willing to concede?
The Greek bailout programme, agreed with the Troika, expires on 28 February – giving the new government less than a month to finalise a new economic plan. In the face of the unknown, it seems likely that both sides will be willing to compromise. Germany might have dismissed the possibility of more debt relief, but restructuring seems likely. Germany’s own debt, was after all largely wiped out in 1953. Any exit from the Eurozone, most commentators seem to agree, would be unintentional – and triggered only in the event of an agreement not being reached.
5. The Eurozone is (probably) strong enough to withstand Grexit.
If Greece were, however, to leave the euro, the general consensus is that the Euro zone might survive – just. According to JP Morgan, a Greek exit would see the euro fall to 1.05 against the dollar, resulting in significant costs and volatility in trade with the US and China, but Europe would be structurally sound enough to withstand Grexit since safeguards were implemented in 2012, such as the European Stability Mechanism (ESM), which means that Greece has less leverage in threats to leave.
Greece might also be able to recover from a European exit since the government runs a primary surplus – if the debt was wiped (which would happen in the event of Grexit) the country would immediately be better off because the government collects more than it spends.
Even so, the real concern regarding Grexit would still be the risk of contagion. Although Germany would hope that Greek pain or forcible ejection from the Eurozone would put other countries off from following suit.
If Greece was seen to be doing well after a couple of years, its currency cheap and its exports (and holiday resorts) booming, it’s possible that Italy or Spain (where the rise of leftist parties such as Podemos has been a threat) would attempt the same.
6. But still, Grexit would be a risk that no one actively wants to take
A Grexit is simply too risky to be in any elected politician’s best interests. Nobody – not Syriza, the Greeks, Germany or the European Union – actively wants Greece to leave the Euro. In theory, therefore, it should be possible to broker a compromise and avoid a breakdown of the common currency.
This is an edited version of a briefing note from CapX. If you’re even vaguely interested in centre-right comment, you should read CapX regularly (or download the App).