Greece – Pressures Building

Even as European leaders grapple with a refugee problem and the possibility that the UK will vote to leave the EU this summer, they are bracing for a renewed crisis over Greece’s unsustainable debt burden. The governing alliance of the leftist SYRIZA and the conservative Independent Greeks claims a three-seat majority in the Parliament, and with the refugee crisis putting additional strain on Greece’s fiscal resources, the domestic political climate is becoming increasingly less conducive to implementing the unpopular structural reforms on which external financial support is conditioned.
Against that backdrop, talk of Greece’s forced exit from the euro zone is circulating once again. Although the so-called “Grexit” scenario remains a worst-case possibility, it cannot be ruled out, given that the political scope for resolving a fresh debt crisis will be more limited than was the case last year. Ongoing bailout negotiations are unlikely to produce a face-saving victory for Tsipris, who has quietly dropped demands for partial debt cancelation. Even the less drastic option of extending the timetable for debt repayment might not be feasible, given the heavy pressure on the German government to grant Greece no further concessions.
In the meantime, domestic social tensions are rising, and the unrest caused by labor strikes and civil protests has more recently been supplemented by overt displays of political violence, such as a petrol-bomb attack on the home of State Minister Alekos Flabouraris, a close aid of Prime Minister Tsipras.
Legislative elections are not required until October 2019, but the possibility of yet another snap poll is high. The center-right ND has come out on top in most recent polls, but the continued fragmentation of public support among several ideologically diverse parties will pose an obstacle to forming a viable majority government if the current alliance of SYRIZA and Independent Greeks cannot be sustained.
Revised data indicate that the economy grew slightly during the final quarter of 2015, but that was not enough to prevent an annual real contraction last year, and it is unclear to what extent the fourth-quarter growth was fueled by a loss of confidence in the banks that encouraged households to spend, rather than save.
The economy is forecast to contract again in 2016, although by how much will be influenced by the performance of the tourism industry, which is a key source of employment growth. The anticipated escalation of domestic unrest does not bode particularly well in that regard.