By Alexandre Afonso, Lecturer in the Department of Political Economy at King’s College London
31 Dec 2014
The Big Question: Now that Greece has called a snap election, which may well see Left-wing Syriza coming to power with a promise to repeal austerity, Alexandre Afonso asks whether this really can be done
The Greek Parliament is dissolved and snap elections need to be called within thirty days Photo: Reuters
On Monday, the Greek parliament failed to elect a new president.
Stavros Dimas, the candidate backed by coalition parties PASOK and New Democracy, did not receive the 180 votes he needed. The parliament is dissolved and snap elections need to be called within thirty days.
With 28 per cent, Syriza, the left-wing party promising to defy the Troika, is leading the polls ahead of New Democracy, at 25 per cent. Once again, international markets have reacted vividly to the imminent threat of political instability in the Eurozone's most fragile economy.
The Greek stock exchange slumped by 10 per cent, and yields on government bonds increased by more than 12 per cent. However, the extent of this panic is nowhere near the levels that we have seen in the past. The bonds of other Southern European countries have remained largely untouched. Italy has been selling its 10-year bonds at a record-low 2 per cent, showing that risks of contagion seem largely contained.
Does this mean that Greece would be allowed to depart from the harsh austerity course it has been following for the last four years if Syriza came to power? Or that a an actual Grexit becomes possible because its consequences for the Eurozone would be less catastrophic than anticipated?
Why is there another political crisis?
Greece has been going through a period of instability since the start of the Eurozone crisis.
The capacity of governments to carry out the austerity reforms mandated by the Troika has often held by a thread, because of their huge unpopularity. The electoral base of PASOK and New Democracy, the two parties which have signed and carried out the adjustment programme, has shrunk dramatically – in a context of declining purchasing power (real wages are 25 per cent lower than in 2007), soaring unemployment, massive cuts in public expenditure and tax hikes.
On the fringes, Syriza (on the Left) and Golden Dawn (on the extreme Right) have capitalised on popular anger against austerity, and largely based their programme on the rejection of the adjustment programme. In this context PASOK and New Democracy have had no other choice but to form a political alliance to implement the adjustment programme and appear “responsible” (vis-à-vis creditors) but not “responsive” (to voters).
If this was the only way to satisfy international lenders, it has fed the rise of their competitors and undermined their own capacity to govern.
What would happen if Syriza comes to power?
The first thing that Alexis Tsipras will do if he becomes prime minister is to negotiate with international lenders. His major task will be to reconcile his electoral promises of restored spending power to voters with the demands for savings of creditors.
The cornerstone of Syriza’s economic agenda is to restore pre-crisis spending and consumption levels, drawing on the idea that aggregate demand is the main problem of the Greek economy and not its flexibility or competitiveness. This agenda is diametrically opposed to the guiding principles of the adjustment programme that New Democracy and PASOK have signed with the Troika, which was heavily geared towards supply-side reforms (notably in the labour market) and fiscal retrenchment.
Besides a 13 billion welfare package, Syriza also proposes to cancel a number of liberalisation reforms implemented under the referendum and revert to the status quo ante.
It is very uncertain that international lenders would agree to such a dramatic reversal in the policies they have been championing over the last five years. This is the case even if the consensus for austerity has been eroding throughout Europe. Besides, it is unclear whether this programme is financially viable in a context where Greece simply cannot survive without external help.
Syriza says it wants to restore Greek sovereignty over the dictatorship of creditors, but this sovereignty would be severely limited if international lenders turn off the tap. Since Syriza has declared its commitment to staying in the Eurozone, any negotiation will necessarily involve concessions that it may be unwilling to make in the light of its electoral promises and high electoral volatility. The electoral collapse of PASOK (from 43 per cent in 2009 to 4.5 in the latest polls) has shown that angry Greek voters are more than ready to sanction the parties who betray their promises.
How would Eurozone members respond?
In many respects, the impact of a Greek default no longer appears as the cataclysm that it was thought to be two or three years ago.
Fears of contagion to other, larger Eurozone economies seem less pressing than in the past. The role of the ECB has been central in this respect, and Greece is more clearly perceived as a special case with a separate set of problems than Spain or Italy. This could work both ways for an anti-austerity government in Athens.
One the one hand, if risks of contagion are contained, this could open the door for an actual exit from the Eurozone. In many respects, this seems to be the only way for Greece to solve its problems in the long term, as the path of internal devaluation it has followed has dragged down its economy without actually boosting its exports.
Of course, a Grexit would be a big bang with huge immediate consequences, but the alternative seems to be a long and slow death ending with a whimper.
Arguably, the situation would be less critical if it was effectively accompanied by the ECB. On the other hand, the realisation that Greece would not necessarily drag down the Eurozone in its fall could potentially spur European leaders to be more accommodating with a Syriza government if it were to win in the polls.
Even if Jean-Claude Juncker and other European leaders have warned Greek voters against the dangers of voting “the wrong way” (sic) for anti-austerity parties, it would still be politically difficult to undermine an elected government at a time when Eurosceptic support is increasing in many parts of the European Union.
Alexandre Afonso is a Lecturer in the Department of Political Economy at King’s College London.