Greek Elections Draw the Eurozone Closer to Political Conflict

01.09.15

Greek Elections Draw the Eurozone Closer to Political Conflict

01.09.15
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By Luke Iott for Global Risk Insights

After his third and latest attempt on December 29th, Greek Prime Minister, Antonis Samaras, failed to successfully nominate Stavros Dimas as the country’s president. Samaras received only 168 votes out of the 180 needed in the 300 seat parliament. As a result the Greek parliament has been dissolved and Samaras has called for snap elections to be held on January 25th, 18 months ahead of schedule.

It is possible that this will lead Syriza, the leftist opposition party headed by Alexis Tsipras, to gain control and plunge the country into a new political and economic crisis.

A close race between Syriza and New Democracy

However likely at this point, a Syriza victory is by no means guaranteed in the elections. While Syriza has consistently polled 4 or more percentage points higher than the New Democracy Party since this summer, it has seen its lead slip in December down to a margin of 2.5 to 3.5 points.

Paradoxically, new public opinion polls released by Pulse also show that Greeks would prefer to keep Samaras as prime minister over Tsipras, clearly showing that the election is far from decided.

According to Greek electoral rules, either party would need roughly 35 percent of Greek votes in order to gain an absolute majority. However, with Syriza currently with 28 percent of the vote, neither party is expected to do so. If circumstances continue, a coalition government with smaller parties is highly likely regardless of a Syriza or New Democracy win.

What does this mean for the Greek economy?

The rise of the Syriza party has been on the wave of anti-European, anti-austerity sentiment that has grown in Greece following the 2010 and 2012 bailouts. While austerity measures have worked to give Greece a current account surplus before any interest payments, unemployment still remains at 25 percent, GDP has fallen over 20 percent since 2010 levels, and average annual wages have fallen sharply, making life difficult and increasing anger at the current government.

With the recent political instability, Greek markets have become increasingly shaky and more volatility is expected up to the election. Immediately following Samaras’ election announcement, the Athens stockmarket fell by over 5 percent and 10-year bond yields rose to over 9 percent.

Investors have been particularly worried about Syriza’s more radical claims to reject and default on its IMF and ECB loans as well as a Greek exit from the Eurozone and return to the drachma.

The lack of a clear path for a parliamentary majority and the rise of Tsipras to national politics has led Syriza to moderate its position in recent months; the core of Syriza policy still calls for a large portion of Greek debt to be written off, a lightening of austerity conditions, and a renegotiation of its loan terms.

Showdown looming between Greece and the European leaders

There is serious doubt whether the Troika, consisting of the IMF, ECB and EC, will play ball with Syriza’s demands. German Finance Minister Wolfgang Schäuble has said that “new elections change nothing in the accords struck with the Greek government” and that “every new government must respect the agreements made by its predecessors,” reflecting a firm German stance against any possible compromise.

Because there is now little systemic risk to the rest of the Eurozone members in case of an exit or default, as was the case in 2010, Greek bargaining power has diminished. Angela Merkel’s chief advisor, Michael Fuchs is quoted as saying that, “the time where we had to rescue Greece are over. There is no potential for political blackmail anymore. Greece is no longer of systemic importance for the euro.”

However, despite any outwardly hard stances made by Germany, there have also been rumors of secret talks this week suggesting that in the end some compromise will most likely be reached between Greece and its lenders.

Tsipras had already met with ECB President, Mario Draghi, in June to discuss the economic and political situation in Greece as well as Tsipras’ vision for a way forward within the Eurozone. The IMF has even admitted that the level of debt Greece has been saddled would be impossible for any country to repay.

Ultimately, if it can bring the Troika to the table in a compromise, a Syriza victory may be positive for Greece which has already made significant economic, structural reforms at the cost of its population.

Even if Syriza is able to obtain slight concessions from its lenders regarding the terms of Greek debt, Greeks will be able to feel slightly more breathing room from the crippling austerity they have suffered up until now.

Greek crisis raises larger questions for the rest of Europe

With little fears of a Greek financial contagion as countries like Spain, Portugal and Ireland make meaningful recoveries, European leaders are certain the current crisis can be contained to Greece.

However, will they be able to contain larger Greek sentiment that has led to the current crisis? In many ways the harshness of Greek austerity was imposed as an example to the rest of the Eurozone members who accepted similar bailouts and any concessions made with Syriza will naturally raise questions and political debate regarding the austerity conditions that other states were forced to except during the 2010 financial crisis.

If Greece is able renegotiate its terms in order receive more favorable conditions, other states feeling the pain of austerity will naturally ask why they cannot do the same.

Additionally, a Syriza victory will only increase the popularity and strength of other populist and anti-establishment parties in Europe who hold many of the same platforms, particularly concerning austerity. The Spanish Podemos Party and the Italian Northern League and Five Star Movement are already using Syriza’s rise as a rallying source for their own national platforms.

In this sense, the current crisis in Greece brings to a boil the larger crisis within the Eurozone which has yet to be settled, a battle between those states insisting on austerity and those pushing for a more balanced approach and responsible growth.

Tsipras’ interview in early 2013 with DC based think tank, the Brookings Institute holds especially true now. “Truly, in my opinion, in order for us to remain in the Eurozone over the long term, in order for the Eurozone to survive, we need a radical change of plan. We need a rational reconsideration and review of our strategy to combat the crisis. And not just on a Greek level; on the European level. But this new strategy will not come until and only when a party like ours comes to power and says enough is enough. Not just in our country but in Brussels as well.”

Whatever the outcome for Syriza in the upcoming Greek elections, this debate will certainly continue to get louder, especially as the ECB considers new monetary policy this January, with the potential for sovereign bond purchases on the table.

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