By KONSTANTINOS ACHILLES KANELLOPOULOS
BOLOGNA — On January 26th, 2015, Alexis Tsipras became Greece’s new Prime Minister, a day after the Coalition of the Radical Left, known as Syriza, won a resounding electoral victory and formed a coalition government with the small, right-wing Independent Greeks party. Apart from becoming the youngest Greek PM in 150 years, the 40-year-old Tsipras is also the first populist leader to be elected on an explicit promise to challenge the German-sponsored austerity policies that have prevailed in the European Union since 2010. Correspondingly, anti-establishment parties across the continent (like France’s National Front and Britain’s U.K. Independence Party) and more specifically, in economically strained countries around the Eurozone’s periphery like Spain’s Podemos, hailed Syriza’s triumph in Greece’s elections as a turning point, seeking to boost their supporters’ confidence that they can put an end to the EU’s economic policies they blame for the region’s seven-year economic slump.
In order to understand this political earthquake in Greece, it’s essential to look at the country’s “standby arrangement” signed in May 2010 between Greece and the country’s so-called “troika” of creditors: the IMF, the European Central Bank (ECB), and the European Commission. In the framework of the memorandum (as the arrangement is also known), the country was kept afloat and therefore an exit from the common currency (an event also known as ‘Grexit’) was avoided when the troika extended two consecutive bailouts totalling €240 billion ($270 billion) in return for a combination of austerity and reform.
Thus, after six years of recession, the harsh economic medicine prescribed by the troika and imposed by successive Greek governments has been terrible for Greece: the economy has shrunk by a quarter, making for a post-2008 drop in GDP not much different from the one experienced during the first five years of the U.S. Great Depression. The overall unemployment rate stands at 28 percent; youth unemployment is above 50 percent and debt as a share of GDP has been pushed to 175 percent from a pre-crisis level of 109 percent. To make matters worse for Greece, the catastrophic economic crisis has also evolved into a humanitarian tragedy: three in every five Greeks, or some 6.3 million people, are living in poverty or under the threat of poverty due to material deprivation and unemployment. Additionally, according to the EU’s statistical agency, Eurostat, the country ranks at the top among the EU’s 28 member states in terms of poverty risk and also has the highest poverty share in the population (23.1 percent).
In this context, Tsipras was able to transform Syriza from a small far-left fringe party to an electoral powerhouse, growing from 4.6 percent in 2009 to 27 percent in 2012, and finally to 36.6 percent in 2015, by capitalizing on Greek voters’ disenchantment and by imitating the socialist party’s (PASOK) early radical style: a mix of populist language and grand promises of change through the expansion of the public sector, which many voters associate with the good times, since PASOK towered over Greece since 1981. Tsipras and Syriza staked the election campaign on repudiating the steep budget cuts Greece agreed to, thereby aiming to end the vicious circle (favlos kyklos) of austerity, as well as the unprecedented misery and anger caused by it. Conversely, New Democracy, the conservative party that headed Greece’s previous coalition government after 2012, formed its campaign around the fear factor, casting the election as a de facto referendum on Greece’s future in the Eurozone. Evidently, Syriza’s promise of “hope” prevailed.
Overall, Tsipras has insisted that markets “will have to dance to the tune” of his government, while Syriza vowed to boost public spending, reverse privatizations, increase salaries and pensions and repeal bailout laws liberalizing the markets. Syriza has also promised to deliver a spending package aimed at Greece’s struggling poor, and then use the money earmarked for debt payments on social programs in the country. But the new Greek leader’s biggest promise, and the one that has stirred deep anxiety in Brussels and Berlin as well as in financial markets, has been a pledge to force Greece’s creditors to renegotiate the terms of its financial bailout. Particularly, Tsipras has called for the troika to forgive about one-third of the country’s enormous debt, which according to the Finance Ministry currently stands at €321.7 billion ($360.4 billion).
Consequently, Tsipras started his premiership on a collision course with the troika, which together holds 80 percent of Greek sovereign debt. However, if Tsipras and the troika fail to reach a deal, Greece could default and lose access to bank liquidity, thereby precipitating a rapid Grexit. This calamity would lead to even worse suffering for the Greek people, not to mention the contagious instability across the Eurozone, especially in indebted periphery countries like Italy and Spain.
Despite the chaotic cacophony, two weeks after Syriza’s overwhelming victory, it looks like there might be a way to cut a deal. Following Tsipras’ and his Finance Minister’s whirlwind tour of European capitals, it became clear that the government had adopted a more conciliatory tone. They pledged to repay in full obligations to the ECB and the IMF by repaying maturing bonds and loans, respectively. Additionally, the government abandoned its demands for a debt haircut. Subsequently, Greece’s economic czar, Yanis Varoufakis, accepted the idea of primary surpluses with lower targets. Under the current program, Greece foresees annual surpluses of 4.5 percent of GDP, while Dr. Varoufakis suggested a 1-1.5 percent value and made clear that private investors won’t be asked to shoulder additional losses.
Clearly, the compromises made by Tsipras (and there are many more to come) and his government will be a huge somersault – what Greeks call a kolotoumba – on their promises to the Greek people. Now that Tsipras has been elected, he needs to be less of a populist demagogue and more of a pragmatic leader. Despite his party’s hard-left policy platform, surprisingly, Syriza could be more open than its predecessors to breaking the grip of entrenched interests. And while its election success can’t be undone in any event, the fact of the matter is that a Greek default – and inherently, a return to the drachma – needs to be avoided at all costs. Now, all that is missing is a symbolic compromise-agreement by the troika.
In spite of the fact that debt forgiveness would be something very hard for Europe’s leaders to sell to their own voters since they’ve boxed themselves in, like Tsipras, they can provide debt relief in many other ways without writing down any debt per se. “Extend and pretend” is different way to offer relief. In this notion, maturities on Greece’s debt should be repaid over 50 years instead of 30 years, thereby saving the country around €3 billion a year in interest costs. Furthermore, costs should be cut again with concessionary interest rates, perhaps by including a moratorium on payments. Last but not least, as Varoufakis suggested, the creditors could tie debt service to Greece’s growth rate, meaning that the stronger its economy is, the more it will pay.
Accordingly, If Mr. Schäuble, Mr. Draghi and Mrs. Lagarde show leadership and meet Tsipras half way, a win-win-win will become possible. By saving the Greek economy from its tailspin, this necessary reversal from austerity to growth will stabilize the Eurozone and lay the foundation for inclusive growth across the region.