The polls are pointing to an election victory for the Syriza party in Greece’s election on January 25. The radical left party’s popularity comes from its opposition to the austerity policies that have been implemented by the governments of Greece’s two mainstream parties, Pasok and New Democracy in obedience to their eurozone financiers.
It is important to note, however, that Greek elections are taking place increasingly often. In theory, elections should only happen every four years. Yet, after the 2009 elections (which the mainstream, centre-left Pasok party won with a clear majority), there were two successive elections (in May 2012 and in July 2012) and now another. Some political parties speculate that, if a stable government fails to emerge, a second round of elections might happen again within a month.
This constant changing of government is not good for a country’s economy, disrupting the implementation of economic policies and undermining any meaningful investment in the country. It does mean, however, that whatever the result is on January 26, it is not set in stone and Syriza may not have all the power that is hoped or feared (depending who you support). And though Syriza are popular, they are unlikely to win a majority and will have to form a coalition, unless they want to provoke a second round of elections. This may influence their policy options.
Dealing with debt and the eurozone
The prospect of a Syriza win has led to rumours that Greece might leave the eurozone if, for instance, the eurozone’s core (Germany in particular) refuse to negotiate with them over repaying the country’s debt.
It is so far unclear how Syriza will proceed – even if they win the election by a majority. Though they have repeatedly said they will negotiate a further cut in Greece’s debt, they have not explained how they will make this happen. Their desire to stay in the eurozone is clear, but they have threatened that, if negotiations with the eurozone fail, they may not pay back part of Greece’s debt obligations.
But can Greece actually pay back its debt obligations? To answer this, we note that Greece’s debt, currently at 175% of its GDP, is substantially bigger than the debt burden in other peripheral countries. Indeed, in 2014, Italy’s debt stood at 133% of its GDP. Portugal’s debt stood at 129% of its GDP. Spain’s debt stood at 92% of its GDP. Compare all these figures with Germany’s debt which stood at “only” 77% of its GDP (UK public debt is at 80.9%).
More importantly, Greece needs to pay back €22.37 billion (around 11.9% of its GDP) in 2015. This is a huge obligation. Greece urgently needs financial support coming from an agreement with the so-called Troika (that is, the European Commission, European Central Bank and the International Monetary Fund).
The alternatives are:
Greece rolls-over its debt obligations by borrowing directly from the financial markets. This is almost impossible because Greece can currently borrow at around 9% (at a ten-year horizon) or, even worse, at around 12% (at a three-year horizon).
Greece refuses to pay the €22.37 billion it owes in 2015 (or part of this money) and therefore defaults.
Greece borrows domestically, that is from Greek residents by raising taxes. This option will definitely be very unpopular as Greek residents will be unwilling to lend to the government especially if they believe that the country will default and return to the drachma.
With all of the above in mind, the risk of a Grexit is unlikely. At this stage, it is more likely than not that the eurozone’s core and a Syriza government will come together to find a new financial agreement, which would not deviate substantially from what the current government has agreed to.
Should a Grexit take place, it will affect Greece more negatively than anyone else. This is especially the case now the European Central Bank has implemented a program of quantitative easing.
All this, with an important caveat: in her visit to The London School of Economics shortly after the 2008 financial crisis, Queen Elizabeth famously wondered why economists failed to predict it. Seven years on, it is not clear to me whether our economic predictions have actually become much more accurate. In other words, claiming that a possible Grexit will leave the eurozone immune, is definitely bold.