The victory of far-left Syriza in last weekend’s Greek general election opens a dangerous new phase in the eurozone crisis. Its leader Alexis Tspiras has demanded an end to the “fiscal waterboarding” that in his view has left Greece trapped in a debtor’s prison. But the rest of Europe, and Germany in particular, have so far stood their ground. If no compromise can be found Greece risks being bundled out of the euro by the end of the year.
The scale of Greece’s problems sets it apart from the rest of Europe. The depression Athens suffered was as deep as any since the 1930s. Unemployment has soared and remains high, and Greece remains cut off from capital markets while other countries borrow ever more cheaply. After a rescheduling in 2012, its enormous debt is mostly owed to other European governments.
It is easy to see why Syriza put debt repudiation at the heart of its electoral campaign. John Paul Getty once opined that “if you owe the bank $100, that’s your problem; if you owe the bank $100m, that’s the bank’s problem”. Greece’s predicament may ultimately force creditors to the negotiating table. To service its debt burden would require Greece to operate as a quasi slave economy, running a primary surplus of 5 per cent of GDP for years, purely for the benefit of its foreign creditors. Even the IMF has dropped hints in favour of some debt forgiveness.
But Greece’s EU creditors have equally strong reasons for refusing. Caving to Syriza’s demands would come at a high political cost, particularly for Germany’s Angela Merkel, who is harried by the eurosceptic AfD on her right. Other struggling countries would find their own radical parties emboldened by Syriza’s success. No country deserves to live beyond its means indefinitely.
Back in 2011, Greece posed an existential threat to the eurozone. Today, Berlin and Frankfurt are no longer as frightened by the prospect of Greece leaving the single currency. Yet for the Greek people this would be a catastrophe: a giant economic step backwards and a blow to living standards just as severe as any endured under austerity.
Therefore, despite his jubilant post-match rhetoric, the cards remain stacked against Mr Tsipras. If he is determined to stay in the euro, he and his party will have to compromise. The new coalition government in Athens must continue difficult reforms to ensure greater competitiveness. Repudiating all of the conditions imposed as part of past bailouts is simply unrealistic. Some of Syriza’s programme represents progress: the commitment to tackle tax evasion and the dominance of the economy by oligarchs. But mostly, Syriza wants to spend money that Greece does not have: on civil servants, free food and electricity and a higher minimum wage.
The EU should respond in kind to any signs of pragmatism from Syriza. On debt, arguments about fairness cut both ways; those banks that heedlessly lent money before the crisis must bear some of the risk. A programme should be agreed that restores the Greek economy to a level where debt repayments become affordable. This could be done so that creditors still do not take a writedown of the amount owed. The neatest way would be to link repayments with the level of Greek GDP.
A deal linked to growth would effectively turn Greek debt into risky Greek equity, which creditor nations will still find hard to swallow. But demanding money back merely to hasten the bankruptcy of the Greek state makes no sense. German voters (and other creditors) presumably want to be paid back in euros and not drachmas.
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