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Five years ago, Greece’s sovereign debt problems nearly brought down the eurozone. In February 2010, the country found itself unable to pay its creditors and was forced to turn to the European Union (EU) and the International Monetary Fund (IMF) for aid. As a euro user, Greece was required under the Maastricht Treaty of 1992 to keep deficits below 3% of its GDP and to keep its public debt below a 60% ceiling. However, Greek political officials concealed the true state of their budget situation with the help of American investment bank Goldman Sachs. This allowed them to join the eurozone and borrow at low interest rates. When the true size of Greece’s debt was revealed, panic swept European markets, especially those of heavily indebted countries such as Portugal, Italy, and Spain. The fear was that if Greece failed to pay its debts that other indebted European countries, all of whom are euro members, would as well. To calm markets, the so-called Troika of the EU, the European Central Bank (ECB), and the IMF stepped in and funneled billions of dollars in loans to the Greek government. This assistance required painful austerity measures, which caused Greece to increase taxes and reduce public spending. The austerity measures have been very unpopular in Greece and two weeks ago, on January 25, the Greek populace elected the far-left SYRIZA Party, which opposes austerity. New Prime Minister Alexis Tsipras has vowed to not follow the conditions imposed by the Troika and is seeking a restructuring of Greece’s external debt. Analysts warn that SYRIZA’s position puts it on a collision course with powerful EU nations such as Germany and that Greece’s recent election might take it out of the eurozone.
This topic brief will explore Greece’s current economic problems, discuss the outcome of the recent Greek election, and how the country’s future debt negotiations may proceed.
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Greece’s Economic Woes
As with most topics, a history lesson is needed about Greece and how it found itself with a public debt that The Christian Science Monitor on January 28 notes is 180% of its gross domestic product (GDP). This is the second-highest debt-to-GDP ratio in the world after Japan. The Carnegie Endowment of International Peace on January 27 notes that Greece’s problems started after democratic rule was restored in 1974. Prior to that point, Greece was governed between 1967-1974 by a military junta that did little to modernize the country. Subsequent governments tried to fix this, but Socialist governments under Andreas Papandreous from 1981-1989 and 1993-1996 paid more attention to the poor and other marginalized groups, which served to harm the country’s middle class through excess taxation. The government also appointed politically connected individuals to run public corporations, thereby encouraging rampant cronyism that led to more pronounced economic inefficiencies. By the 2000s, Greeks had come to see corruption as socially acceptable and tax evasion was rampant. After adopting the euro in 2001, the Greek government had access to cheap credit because the euro was deemed as a safe currency in light of the terms of the Maastrict Treaty, which called for low budget deficits and low debt-to-GDP ratios by euro-using governments. These funds did little to encourage more fiscal responsibility or promote the efficient role of the state, and by late 2009 the Greek government faced a sovereign debt default. Only the injection of funds by eurozone governments, the European Central Bank (ECB), and the International Monetary Fund (IMF) – these three entities are the so-called “Troika” – have kept the nation from defaulting on its debts.
In return for more than $200 billion in aid from the Troika, the Greek government agreed to a series of reforms that were meant to help the nation pay off its creditors. These reforms have enabled the Greek government to run a surplus of 3% GDP, which is a positive step, but there has been a painful human cost due to these reforms. A word extempers should use a lot in speeches about Greece, and one that they should define for judges, is “austerity,” which means that governments have to tighten their belts and cut spending. The Troika demanded that the Greek government enact tax reform, cut government spending, and privatize some state-owned assets. Most of these dictates flowed from Germany, which has been the champion of austerity in Europe. Many Greeks have opposed austerity, arguing that it was imposed from abroad and is punishing average Greeks who never signed off on the loans previous governments agreed to. The Christian Science Monitor article previously cited explains that Greece’s economy resembles the United States during the Great Depression. Over the last five years the Greek economy has contracted by 25%, the country has an unemployment rate of 25%, and the unemployment rate for Greek youth is in excess of 50%. Politico on January 27 writes that 50% of Greeks now live below the poverty line. Some services, such as electricity, have been cut to people who could no longer pay their bills. The Greek government also cut the minimum wage as part of the Troika accord from 751 euros to 589 euros. Older Greeks have also seen their pensions cut as a result of the austerity measures.
Although Greece’s political parties knew that austerity was unpopular, they considered it a better alternative to a sovereign debt default, which would possibly send the country out of the eurozone and explode the country’s future borrowing costs. Greece’s previous government was led by Antonis Samaras of the center-right New Democracy Party. New Democracy entered into a coalition with the socialist PASOK (the Panhellenic Socialist Movement) following elections that took place in June 2012. PASOK has been hurt the most of all Greek parties by the debt crisis because, as Foreign Affairs explains on January 25, PASOK was in power when the economy imploded due to the debt crisis. In addition, PASOK was responsible for many of the country’s large-scale spending programs during the 1980s, choosing to rely on high levels of government spending and low taxes to win votes. As austerity programs grew more unpopular, New Democracy and PASOK faced the wrath of voters, who argued that both parties, which have a long history in Greek politics, no longer cared about the average Greek.
Of course, New Democracy and PASOK did significant damage to their brands when they only tepidly enacted some of the reforms the Troika demanded. The previous Greek government was still unable to effectively clamp down on tax evasion. It also proved unable to eliminate overregulation in the Greek economy. Fortune on January 28 notes that overregulation is killing innovation in the Greek economy. Laws prohibit pharmacies from operating if they do not run a profit of more than 15% and some are able to establish monopolies on the sale of non-prescription drugs. This makes it very difficult for new businesses to emerge in the economy. Also, businesses are reluctant to hire workers because Greek law prohibits companies from firing more than 4% of their workforce unless they receive permission from the government. The IMF has already criticized Greece for not implementing structural reforms fast enough, withholding $8 billion in new aid. This is money that Greece sorely needs if it is to balance its budget for this fiscal year. New Democracy and PASOK also proved unable to extend the power of the Greek state, as some laws enacted by the central government are still not enforced. The Carnegie Endowment for International Peace explains that in 2010 the Greek government passed a law forbidding smoking in bars and restaurants throughout the country, but the law remains unenforced.
The New Greek Election
As the pain of austerity continued, voters took to the streets. Many of these protests were led by left-wing forces affiliated with SYRIZA, which stands for the Coalition of the Radical Left. When austerity measures began in 2010, SYRIZA was one of the first political organizations to lead protests. Extempers should realize that SYRIZA is actually a coalition of a variety of left-wing interests that range from communists to environmentally-oriented Green Party members to moderate Social Democrats. What unifies them is a hatred of austerity and financial elites that it believes are unnecessarily punishing the Greek people. The leader of SYRIZA is Alexis Tsipras, who has been SYRIZA’s president for the last seven years. The Huffington Post explains on January 26 that Tsipras is a former member of the Communist Youth League and that he cut his teeth in politics by opposing education reforms by the Greek government in the 1970s. The Economist on January 26 adds that he is an avowed atheist. Since the 2012 parliamentary elections, SYRIZA has been the second-largest party in Greece.
The recent elections took place after the Greek parliament failed three times to select a new president. The Greek president serves a largely ceremonial function, but their election requires a two-thirds vote from parliament. The failure to elect a president is deemed as a no-confidence motion of the sitting government, which is why Greek voters headed to the polls two weeks ago on January 25. In the ensuing election, SYRIZA won 36.3% of the vote, giving it 149 seats out of 300 in the Greek parliament. The previously governing New Democracy Party received 27.8% of the vote, or seventy-six seats. This represented a loss of fifty-three seats over what the party enjoyed in the previous parliament. PASOK captured a mere 4.7% of the vote – compared with 40% five years ago – and lost twenty seats. It will have a mere thirteen seats in the new parliament. The neo-Nazi Golden Dawn Party finished third in the election with 6.3% of the vote. It will have seventeen seats in parliament, a decline of one seat over 2012 levels. Some analysts were surprised Golden Dawn finished so low, but its continued performance above the 5% threshold is a sign that Greeks are willing to dispense with traditional parties and go to more radical alternatives. It should also be noted that SYRIZA’s victory makes Tsipras the youngest prime minister in the history of modern Greece.
Since SYRIZA was just two seats short of an absolute majority in parliament, it required a coalition partner. It found one in the Independent Greeks, a right-wing party that has little in common with SYRIZA. However, the Independent Greeks, who won 4.7% of the vote, also oppose the Troika’s austerity measures. U.S. News & World Report writes on January 29 that the alliance between SYRIZA and the Independent Greeks illustrates how there is sufficient common ground between left-wing and right-wing populists throughout Europe. The European radical left and right both favor a re-nationalization of political and economic matters. Both forces are suspicious of the EU and oppose distant elites, although right-wing forces tend to show more strains of anti-immigrant sentiment than left-wing groups.
SYRIZA won the election due to their economic platform, which exit polls found attracted left-wing and right-wing Greeks. The Agence France Press reports on January 29 that SYRIZA is calling for a “New Deal,” once again echoing American language from the 1930s. SYRIZA wants to enlarge the public sector and Labor Minister Panos Skourletis has announced plans to restore the minimum wage to 751 euros, thereby contravening the Troika’s demands. According to The Washington Post on January 29, SYRIZA also plans to spend 1.6 billion euros on new food stamps and healthcare spending and it wishes to restore electricity for more than 300,000 Greek households who have been cut off due to lack of payment. Also, SYRIZA has frozen the sale of state-owned assets, which was another condition of Troika aid. The Guardian on January 28 reveals that the country’s largest power corporation, PPC, will not be sold and the sale of Pireaus, the country’s largest docks, to Chinese consortium Cosco is also going to be delayed. SYRIZA also plans to revive collective working agreements that the previous government shelved in order to reduce spending. Collectively, these moves will increase spending levels, but the problem is that the Greek government does not have the money to fund them unless that funding comes from an outside source
To deal with the Greek government’s dire financial picture, SYRIZA is seeking a renegotiation of the country’s debt. Ideally, SYRIZA would love for lenders, who at this point are mostly other European countries, to write down its debts and some economists are arguing that forgiving a large portion of the Greek debt would be the best way to go. The New York Times writes on January 28 that the new Greek Finance Minister Yanis Varoufakis, who left an academic position at the University of Texas to take the job, sees the Troika bailouts as a “toxic mistake,” arguing that there is no way that the Greek government can continue to afford the Troika’s dictates. One of the factors working against SYRIZA is that a review of its progress toward austerity will take place later this month, with seven billion euros of aid on the line. If Greece is found to be blocking progress toward Troika targets, the ECB may cut off emergency lending assistance to Greek banks, which are already witnessing billions of dollars in capital flight as people fear the Greek government is headed down the road to default.
What is clear is that markets are not happy with SYRIZA’s election or its future economic plans. Fortune explains on January 28 that the Athens stock market has fallen by 11% since the election and that the three-year yield on Greek bonds has risen by 16.9%, which means that it is becoming more expensive for the country to borrow new funds. Also, the stocks of Greek banks have fallen upwards of 40% because investors fear that bank runs could occur. With more instability possible, markets may not be kind to Greece over the next two months until its position relative to the Troika becomes clearer.
Future Debt Negotiations
The first priority for SYRIZA and the Troika is figuring out how Greece’s future debt obligations will be handled. There are a wide number of scenarios to consider, but extempers need to keep in mind that most Greeks want to keep the euro and want to remain part of the EU. This might seem odd when one looks at SYRIZA’s platform, but the BBC writes on January 27 that Greeks largely want their debt situation handled more effectively and for austerity policies to be overturned. Greek voters also want greater social benefits from the government. Thus, extempers should not misconstrue the election as a mandate for Greek politicians to go back to the drachma or to leave the EU.
One scenario, which Foreign Policy lays out on January 27, sees Greece and the Troika agree to interest rate reductions on its debt. This would avoid a write down of any of Greece’s debt (meaning that it would pay less). This could also include an extension of when Greek debt matures, which means an extension on when it needs to be paid. This process is easier to accomplish because European governments, rather than private lenders, hold most of the country’s debt and can be more patient in receiving their money back. The Fortune article previously cited from January 28 reveals that the interest rate on Greek debt is currently 1.82%, which is very low, and 80% of the country’s debt does not carry any interest payments for the next thirteen to twenty-five years. Economists speculate that if an agreement can be reached where the Greek government does not have to pay off its debts for seventy-five years that the country could weather its current debt crisis. Restructuring debt may not be what some European countries want to do, but Quartz explains on January 29 that the new Greek government gives European nations a scapegoat for doing so. In return for the restructuring, SYRIZA may agree to pursue a program to crack down on tax evasion, which would also help raise the funds for the Greek government and thereby help with debt repayment. If a renegotiation agreement was reached, Greece would get access to billions of euros of aid, thereby helping SYRIZA fund its social welfare programs.
Another scenario, probably the most unlikely, would see the Troika agree to forgive large portions of Greece’s debt. This is what most Greeks want and this is what SYRIZA is likely to push for. However, if European leaders agreed to this solution it could send shockwaves throughout the continent for several reasons. First, populist forces in countries such as Spain, where the left-wing, anti-austerity Podemos Party is thriving, would feel emboldened to ask for their country’s debts to be cleared as well. This would set a poor precedent for future European fiscal policy. Second, there would be a hefty political backlash. The New York Times writes on January 26 that citizens in Germany, Finland, and the Netherlands, all of whom are in a good fiscal situation, do not want to continue subsidizing fiscally irresponsible nations. Also, agreeing not to receive money lent to Greece would constitute a de facto tax on the peoples of the lending nations. The UK Independent reveals on January 28 that German taxpayers are growing tired of bailouts for countries they deem “lazy.” A forgiveness of Greek debt may serve to bolster the fortunes of the right-wing Alternative for Germany Party, which seeks to end the country’s ties to the euro. And third, even with a package of debt forgiveness, there is little reason to expect that Greece will not find itself in fiscal peril again because, as stated above, the country has to yet enact significant structural reforms that allow for more entrepreneurship and efficient economic activity. Therefore, forgiveness of Greece’s debt would not only set a poor precedent, but it would also set off a political reshuffling of several of the EU’s prominent members.
One of the biggest risks of negotiations between both sides is that the Greek government overplays its hand. Unlike 2012, the EU is not as susceptible to widespread contagion in bond markets if the Greek government defaulted and/or was kicked out of the eurozone. The Washington Post explains that the ECB has stepped in since 2012 and purchased a large number of bonds from indebted nations such as Spain and Italy. This kept their bond yields stable, thereby helping those countries avoid a dangerous cycle where it became cost prohibitive to finance their debt and they flirted with default. It would still not be advisable for Greece to leave the euro, since Foreign Policy says it would possibly provide an excuse for Spain, Portugal, or Italy to leave and that would cause the euro to appreciate as fewer countries would be included. This would harm exports, thereby hurting the German economy, which is reliant on an export-based model. Greece could also look into a default, especially now that it is running a surplus, but doing so risks leading to expulsion from the eurozone. Also, it is unclear whether Greece could survive a default since SYRIZA’s promises to Greek voters would likely absorb some of the existing surplus austerity measures have produced. This means that by the summer the Greek government would be short of cash.
A more radical scenario sees Greece get aid from an outside source, preferably Russia. SYRIZA is a pro-Putin party and Foreign Policy on January 27 notes that the new Greek government does not support European sanctions against Russia over Ukraine. SYRIZA has called Ukraine’s government a neo-Nazi organization, which is rhetoric straight from Putin’s playbook last year. The Council on Foreign Relations on January 28 envisions a scenario whereby Russia offers to bailout the Greek government in exchange for the country leaving the North Atlantic Treaty Organization (NATO) and joining the Russian-led Shanghai Cooperation Organization. This would give Russia access to a warm water port on the Mediterranean. While far-fetched, extempers cannot ignore the fact that Russian trade and tourism dollars matter for the Greek economy, and Russian banks, according to the Council on Foreign Relations, are significant investors in the Greek economy. For example, when Greek Cyprus experienced a financial crisis two years ago, Russians owned 50% of the lost deposits on the island. Also, while this scenario is unlikely to happen – after all, Russia has its own economic problems at the moment – the Russia card may give Greece some leverage against the Troika.
What is most likely to happen is that the Troika comes to a moderate agreement with the SYRIZA-led government. Maturities on debt are likely to be extended, along with a reduction of interest rates, in return for Greece promising to clamp down on tax evasion. A bigger test looms concerning whether SYRIZA falls into the overspending habits of Greek governments that existed before 2010. If that takes place, Greece’s fiscal picture will grow worse and create a more serious crisis in the near future.