Greece and the eurozone crisis: full circle

by George Hatjoullis

Before reading this blog I suggest tracking back and reading ‘Merkel, Greece and the eurozone: another haircut?’, a blog that i published 28 August, 2013 ( It was a matter of time before we arrived at this point.

Syriza, led by Alexis Tsipras, is set to become the largest party in the Greek parliament following a general election on 25 January, 2015. It is powered by anti-austerity sentiment, rather than anti-EU or eurozone. Its popularity is hardly surprising. The cumulative reduction in GDP since 2008 is of the order of 25%. The unemployment rate is around 25%, down from the high of 28%, but still not falling fast enough. The youth unemployment rate is down from over 60% but still hovering around 50%. Improvement there is but from such levels as to barely make much difference to the ordinary lives of the Greek people. In the meantime, Greek sovereign debt as a % of GDP has increased and now stands at around 175%. Despite all this austerity, Greece has yet to make much progress in reducing the debt ratio towards the desired 120%. It is obvious to anyone with a pencil and paper that it is not going to do so without visiting much more pain on the Greek population and for an extended period. The Greek people evidently have no capacity for much more pain and anyone with personal contacts in Greece can sympathise. It is true that Greece is the architect of its own crisis and that major reforms were necessary. However, the size of the task was herculean and the Greek people are not Hercules. There is only so much that they can take. Hence, the growth of support for Syriza.

Tsipras is the not the ogre that the opposition will try to portray. He is not intrinsically anti-EU or eurozone. He is merely suggesting that the pace of reform and austerity be eased and that debt forgiveness be considered. From a social and arithmetic point of view, he has a point. Greece cannot get its debt to GDP ratio down to 120% without risking the fabric of this fragile democracy. If he forms the next government, and the odds are that he will, it is this that he will put to the troika. Unfortunately, his words will almost certainly fall on deaf ears. Even if the troika accept his logic, they have the issue of precedent to consider. And then we have  the Germans. A large part of Greek sovereign debt is in the hands of official institutions. Any debt forgiveness by these institutions is probably illegal and will certainly gain the attention of the German constitutional court. Debt forgiveness is a complex problem, even though the economic logic is compelling.

So what happens when Tsipras and his administration first meet with the troika? The current financing plan ends 28 February 2015 so a tough negotiation faces Tsipras more or less immediately. Tsipras has a slightly stronger hand than his predecessors, ironically because of the austerity and reforms. The 2015 budget predicts a primary surplus of circa 3% of GDP. For the uninitiated this means that, over the year, revenue is expected to exceed expenditures apart from interest payments. Looked at like this one can see that troika finance is really about paying interest and repaying maturing debt. Tsipras might be tempted to declare an interest holiday and slow the austerity programme down a touch. From an economics point of view this is not unreasonable but politically it would be a defining moment for the eurozone. In practice, it is not as simple as it sounds. The timing of revenues and expenditures needs to be considered as the Greek government will lose access to the financial markets and the relationship between the ECB and the Greek banking system will be disrupted on many levels. It may result in a de facto exit from the eurozone.

Predicting the precise path of events following the presumed accession to power of Syriza is impossible and somewhat alarming. However, one cannot imagine Tsipras simply and meekly following the path of Samaras. He needs to give his voters something and the timing of events is such that he needs to do it very quickly. A rock is about to collide with very hard place. The other even darker risk is that Tsipras pushes the issue to the limit and precipitates a failure in democracy. Allende comes to mind whenever I think about the situation. There may be trouble in the eurozone ahead.