Syriza Wins. Now Who Has the Strongest Nerves in Europe?

Anti-bailout Syriza performed more strongly than expected in yesterday’s Greek general election. The party led by Mr Tsipras won more than 36 percent of the vote and, with the addition of the 50 top-up seats awarded to the victors, holds 149 seats in the new parliament. That is only two short of gaining the outright majority that had been widely assumed to be well beyond the range of possibilities. The result meant that Syriza needed the support of only one other party in order to form a government. Significantly, Mr Tsipras chose Independent Greeks, a right-wing, anti-bailout party as Syriza’s partner rather than one of the left-wing parties that are more amenable to accepting the conditions currently attaching to the European Union/International Monetary Fund/European Central Bank’s financial support. Though his party contains a leavening of Trotskyists, his priority appears to be challenging the bailout terms first, and bringing in a transformation of Greek society in a socialist direction only second. To that end, his coalition with Independent Greeks, a party that, if anything, is even more strongly anti-bailout than Syriza, presents a broad political front committed, he will maintain, to Greece’s national interest.

Nevertheless, hopes die hard that, once in office, Mr Tsipras will prove more accommodating of EU demands than his rhetoric when in opposition suggested he might be. This view perhaps reflects, in part, the markets’ inclination to assume that nothing will really upset the state of affairs to which they have grown accustomed; after all, for some years past, reports of existential crisis for the euro have proved to be exaggerated. Then again, opinion polls indicate that around 70 percent of Greek voters want to keep the euro as their currency. Mr Tsipras would surely not brave the disapproval of such a substantial portion of the electorate. Finally, Mr Tsipras himself appeared to tone down his demands during the election campaign. He took to saying that he, too, wanted Greece to remain in the euro zone and that an end to austerity, not debt default, was his primary aim. Even so, the ostensible concern of the majority of Greeks to retain the euro may be no more than a natural resistance to change. Many who apparently wanted to keep the euro may have been considering the question in isolation. If they had been asked whether they wanted the euro, together with austerity for the foreseeable future, they might have given a different answer.

contagion is no longer financial But Social And PoliticalAs for Mr Tsipras, it made sense during the election campaign for him to play down issues relating to debt default, which many voters might have found hard to understand, and to focus instead on the urgent need to end austerity, which all voters would have understood only too well.

Even so, surveys suggest that Syriza’s supporters are not expecting Mr Tsipras to fulfil all his promises. They would be satisfied with any crumbs of comfort he can deliver. That gives him at least some room for manoeuvre in future negotiations with the EU and the IMF. The Greek government may not need fresh international loans until mid-year, when a chunk of existing debt falls due for repayment. But the ECB may well impose a tighter timetable than that for Greece to reach agreement on bailout terms. The existing bailout arrangements run to the end of February. If they are not extended beyond that date, the ECB has indicated it will no longer lend to Greek banks on the security of Greek government bonds. Even the emergency assistance that the Bank of Greece affords to Greek commercial banks is subject to the ECB’s approval. About 20 percent of the funds Greek banks use in lending depend one way or another on this central bank support. Failure to resolve differences between Greece and its creditors by the end of February could, then, quickly bring matters to a head. But, even if Mr Tsipras were resolved to reach agreement with EU partners in the end, he would want to show he had wrested worthwhile concessions from them. This suggests that, at the very least, the next five weeks will see Greece and its creditors playing a game of chicken as the euro teeters on the precipice.

The ECB’s plan to engage in massive buying of government bonds, announced last week, will help prevent contagion spreading from Greece to other euro zone member-states. The principal channel of contagion, however, is no longer financial, as it was in the troubles between 2009 and 2012, but social and political. The EU authorities may well be right in thinking that Greece would be the loser, were it to break with the euro. However, the outside chance that Greece might just be better off after it had exited the euro zone is a risk that EU negotiators might be disinclined to take. After all, other euro zone members might then be tempted to follow the Greek example. In Spain, for example, where a general election is due no later than December, the anti-bailout Podemos party is credited with near-30 percent support in opinion polls, though it was founded only one year ago.

Similarly, it will be difficult for EU negotiators to grant Greece any substantial easing in austerity conditions. Others might insist on similar treatment, thereby weakening fiscal restraint throughout the euro zone. To be sure, not all the powers in the euro zone are insistent on the degree of austerity that the German government is demanding. Perhaps a majority of them now would like to see euro zone fiscal policies relaxed. They could seek to exploit the Greek situation to force through a reorientation of the euro zone’s fiscal strategy. What is starting as a Greek problem could then turn into a rather more serious problem of Germany’s commitment to the processes of European economic integration. The German government would have to decide whether it still wanted to be part of a union with radically different economic goals from its own. Since, already, German support for the ECB’s bond-buying is at best lukewarm, German displeasure at the direction events were taking in Europe could shatter confidence in the euro’s durability.

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About the author

Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.

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