Published in The National Business Review (Auckland), 30 January 2015
The biggest loser in Greece’s snap election was not even on the ballot paper. It was German Chancellor Angela Merkel whose austerity policies in the euro crisis were rejected by Greece’s swing to the radical left.
It was Merkel’s second defeat in a week, after the European Central Bank had announced its quantitative easing programme, which she long sought to prevent.
Since the first bailout package in May 2010, the deal between the EU and Greece had been straightforward. In return for financial assistance and, as an implicit condition of staying in the eurozone, Greece was expected to rein in its government’s spending.
There are few certainties following the election of Alexis Tsipras as Greece’s new prime minister but one thing is clear: As the Tsipras government will be defying the previous austerity and reform diktat, the eurozone’s crisis management of the past five years does not only come to an end, it has failed utterly.
When Greece’s problems became apparent more than five years ago, the aim was to reduce its debt burden to manageable levels, revive its economy and keep it in the eurozone. Of these three goals, only the last one has been achieved – just. Had it not been for international assistance, Greece would have had to leave the euro a long time ago.
Despite a “haircut” on its debt in 2012 and considerable reform efforts, Greece today is in a worse state than it was at the beginning of its crisis. At 177%, its debt-to-GDP ratio is higher than it has ever been. Its nominal economic output is about a quarter below pre-crisis levels. Unemployment stands at 26% and youth unemployment is more than twice that figure. Government spending accounts for nearly 60% of Greek GDP. By all accounts, Greece has become a zombie economy.
You do not have to be a radical left-winger to see that Greece’s “austerity” policies of the past five years have been an unmitigated disaster. However, the total chaos created by the EU’s misguided policies toward Greece certainly explains the election of Mr Tsipras and his radical left Syriza party.
He ran on a platform of three election promises. First, he pledged to renegotiate Greece’s debt burden, that is, to prepare at least a partial default on the country’s debt. Second, he vowed to increase public spending, not least by creating new jobs in the public sector. Third (and often overlooked by international commentators) he still maintains that he could do all this while keeping Greece in the eurozone.
It is clear, as prime minister, Mr Tsipras will not be able to achieve all three promises simultaneously. His ability to implement policies depends on what other European countries and the EU allow him to do.
He may feel in a relatively strong position since Greece is running a wafer-thin primary budget surplus. This means that excluding interest payments, the Greek government’s books are balanced.
This position would theoretically allow Greece to remain operational after a default. Mr Tsipras could therefore threaten to leave the eurozone and unilaterally declare not to honour any government debt. Whether he would pursue such a risky manoeuvre is a different question.
What is far more likely is that Mr Tsipras will try to reach some debt relief through negotiations with Greece’s creditors – as he should. Greece’s debt load is so high that without a partial default there is no realistic way it could be returned to normal levels. A default, then, is nothing immoral or outrageous but a mathematical necessity. It has to happen sooner or later.
There is only one problem with Greece declaring bankruptcy. Since most of Greek debt is now either owned or guaranteed by other European governments and institutions, a Greek default would hit its European neighbours hard.
It is estimated Germany could lose up to €65 billion if Greece cannot service its debt anymore. At a time when the German federal government is celebrating its first balanced budget in over 40 years, this would be an unpleasant surprise.
European politicians therefore have more to lose in a Greek default than Greece itself. The only thing Greece stands to lose is its membership of the eurozone club.
Given these circumstances, it is plausible that Greece and the EU will come to an agreement that allows Greece to reduce its debt load while not letting the true costs of this exercise become immediately visible to European taxpayers.
For example, this could mean reducing interest rates on Greek debt even further from an already low base. Another option is to link debt repayment to economic growth or stretch maturities of Greek government bonds to the day of Christ’s second coming.
All such measures would have the same effect on Greece, namely to reduce debt, but it would conveniently do so by stealth.
Even with such debt relief, it still looks unlikely Mr Tsipras will be able to afford the spending initiatives he has talked about in the election campaign. But he would reduce his country’s debt burden while keeping it in the euro. That’s two out of three and, as Meat Loaf once told us, that ain’t bad.
For Chancellor Merkel, the record looks worse. Throughout the crisis, she promised her voters that her policies would keep the euro a stable currency and protect German taxpayers from other countries’ liabilities. After the events of the past week, it looks as if she will achieve neither.
Over the past crisis years, the ECB has morphed from a central bank modelled on the venerable example of the German Bundesbank into a bigger version of the Banca d’Italia. And, while the euro has not quite become the new lira, it is travelling the best way of getting there. Meanwhile, taxpayers in central Europe had to become used to supporting crisis-prone countries in the periphery.
For a while, Chancellor Merkel could uphold the fiction that, in return for all of that, other countries would at least abide by Germany’s public spending rules. It is not clear, given Mr Tsipras’ election, that this is the case any more.
Greece has emphatically rejected Chancellor Merkel’s policies in last Sunday’s elections. Once German voters realise what a disaster her euro policies have been, they might eventually do the same.