The Coalition of the Radical Left (Syriza) won an early election held on January 25, but appears to have fallen just short of winning an outright majority of seats in the 300-member Parliament. Prime Minister-designate Alexis Tsipras has already signaled his intention to form a coalition with the conservative Independent Greeks, a party formed by dissident members of the incumbent New Democracy that shares little in common with Syriza beyond its anti-austerity stance. The speed with which the partnership was announced sends a clear signal that Tsipras intends to make good on his promise to free Greece from the shackles of austerity, an objective that implies a very real risk of default and the country’s forced exit from the euro zone.
Tsipras maintained throughout the campaign that he wants Greece to remain in the monetary union, but he insists that such an outcome will only be possible if multilateral creditors—the EU, the IMF, and the ECB (the so-called “troika”)—are willing to revise the terms of the bailout program in such a way as to leave the government room to implement policies aimed at spurring an economic recovery. Syriza’s economic policy agenda, which includes tax cuts, spending increases, and a hike in the minimum wage, implies a loosening of fiscal constraints that Greece simply cannot afford without changes to the bailout program. For Tsipras, the key to fulfilling his promises is forcing the troika to give its blessing to a proposed write-off of about one-half of the country’s nearly $400 billion public debt.
Greece’s current bailout expires in February 2015. In the meantime, the troika will determine whether the country qualifies for the final tranche of loans still available under the existing program (approximately $8.75 billion), and the two sides will negotiate the terms of any further support from the IMF and the European partners going forward. The outgoing administration had planned to make use of some $13 billion of unused bank recapitalization funds, but otherwise rely on the availability of a precautionary Enhanced Conditions Credit Line (ECCL) made available through the European Stability Mechanism (ESM) to ensure an appetite among investors for new sovereign bond issues. However, given the negative market reaction to Syriza’s stated fiscal strategy, the current timetable for exit from the bailout is no longer feasible, and euro-zone officials are already indicating that Greece will need a third bailout, a prospect that points to the need for an extension of the current program—possibly by several months—to allow time for negotiations.
The voters who carried Syriza to victory will be looking for immediate moves by the new government to honor its campaign pledges, and any steps in that direction will only diminish the likelihood of fruitful negotiations with the troika. But any delay in delivering on its promises will leave the new government vulnerable to a potentially ferocious public backlash that could spell the rapid demise of the incoming administration.
Signals that Germany is prepared to let Greece leave the monetary union may or may not be sincere, but it is a safe bet that the governments of other debt-hobbled euro-zone member countries will demand the same concessions (if any) granted to Athens, and euro-zone leaders will have little choice but to comply, or risk triggering a surge of support for overtly anti-euro parties in Portugal, Spain, and Italy. With the anti-austerity Podemos already threatening to challenge the dominance of the establishment parties in Spain, it appears that euro-zone leaders will need to show some flexibility if they hope to keep the monetary union intact over the long term.
The immediate questions are whether Germany and the other “core” countries in the monetary union are willing to make the necessary concessions, whether Tsipras is willing (or politically able) to meet them halfway, and whether the new leaders in Athens will display the necessary patience to arrive at a compromise. The key risk is that the new government will take policy steps that produce a fait accompli, leaving Greece’s euro-zone partners to either back a forced debt write-off or let Greece lie in the bed of default, effectively ensuring the country’s messy exit from the monetary union.
Were Germany and the other solvent euro-zone states to allow Greece to extort their blessing for a write-off, the almost certain result would be a surge in support for anti-austerity parties elsewhere in the euro-zone periphery that would no doubt prompt desperate demands by establishment parties in Spain, Portugal, and Italy for their own debt-relief deals. German Chancellor Angela Merkel could not countenance such a strategy without risking a backlash among German taxpayers, who would end up footing most of the bill for regional debt relief. On that basis, Merkel and her counterparts in the euro zone’s “core” will have a strong incentive to cut Greece loose, wagering that crisis that would befall a euro-less Greece would dampen the anti-austerity fervor elsewhere in the euro zone, thereby limiting the danger of a contagion.
At this early juncture, the actual implications of Syriza’s victory remain uncertain. However, the probability of a best-case outcome is unfortunately low, and the risk of a potentially disastrous miscalculation is uncomfortably high.