Why the talk in Europe is all about Greece
With a national debt of 316.97 billion Euros as at the end of 2014, Greece is facing the largest economic crisis in its history. After one of the largest bail-outs in global economic history in 2010, the Greek economy has been a serious cause for concern in the Euro-zone. After joining the EU in Jan, 2001, Greece fell into huge debt within a decade and needed monetary help from the European central bank, the IMF and other borrowing agencies just to keep its economy afloat and functional. In addition to this as a part of its debt structuring plans, the country was required to introduce a series of shrewd austerity measures bringing about widespread social issues and protest, ending up with its people questioning the politics adopted by the government at the time. After years of political uncertainty and non-stop protests, the much awaited Greek parliamentary elections took place on January 25th, 2015 and the first moves of the new government are making headlines all over the world. The local elections also spread ripples within world leaders, especially those based in Europe, with everyone waiting anxiously to see what sort of economic policies and decisions the new government shall undertake.
Austerity measures are attempts to significantly restrict government spending in an effort to control public-sector debt, particularly when a nation is in jeopardy of defaulting on its borrowing.
As its governments with reduced tax revenues and exposure to what some believed were unsustainable spending levels, Greece turned to austerity as a way to alleviate budget concerns. As a result, their budget deficits skyrocketed. Austerity became almost imperative in Greece and other countries within Europe, where Euro-zone members don’t have the ability to address mounting debts by printing their own currency, as done by other countries such as United States of America. As their default risk increased, creditors put pressure on the aforementioned European countries to aggressively tackle spending and resulted in sharp austerity measures. While the goal of austerity measures is to reduce government debt, their effectiveness remains a matter of sharp debate. Supporters argue that massive deficits can suffocate the broader economy, thereby limiting tax revenue. However, opponents believe that government programs are the only way to make up for reduced personal consumption during a recession. Robust public sector spending, they suggest, reduces unemployment and therefore increases the number of income-tax payers.
In addition austerity can be contentious for political, social as well as economic reasons. Popular targets for spending cuts include pensions for government workers, welfare and government-sponsored healthcare, programs that disproportionately affect low-income earners at a time when they’re financially vulnerable. it also includes closing or merging of schools, with many teachers and academic institutions undergoing financial cuts. Large-scale austerity measures have also been such a sizeable social issue that when a new round of austerity measures was met with protests and strikes in June 2011 in Greece, suicides among both men and women increased by 36 percent and they have remained high ever since.
Since the first bailout agreement was signed in 2010 in Greece, three parliamentary elections have taken place (May 2012, June 2012, January 2015); five prime ministers have been in office; and six political parties have participated in the various governments. Those political parties ranged from the conservative Popular Orthodox Rally (“LAOS”) and Independent Hellenes (“ANEL”) to center-right New Democracy (“ND”) and center-left Pan Hellenic Socialist Movement (“PASOK”), to the Democratic Left (“DIMAR”) and now, Coalition of the Radical Left (SYRIZA).
Greece is now ruled by 40-year-old Alexis Tsipras— head of the Coalition of the Radical Left (“SYRIZA”) and the youngest prime minister in Greece since 1865. It is the first time in Greek history that a left wing party has formed the core of a Greek government. Tsipras is the first PM in Greece who has declined to take a religious oath, does not wear a tie, and lives in an apartment in a middle class neighborhood in Kipseli—a destination for many recent immigrants.
During the electoral campaign the political climate was polarized, yet it was characterized by the resounding absence of any concrete proposals and vague statements on the single issue that dominated: Greece’s debt and its relationship with the Troika (IMF, ECB, and European Commission). Parties manipulated symbols and tapped into its voters’ emotional world. SYRIZA prevailed as the main choice within the anti-austerity bloc and gained the votes of people that wanted governmental change and those who believed they had nothing to lose. SYRIZA opted for a safe campaign emphasizing “hope” while skillfully downplaying the term “left.” Importantly, voters who did not believe that SYRIZA would keep its unwavering position during debt negotiations still voted for the party hoping for effective bargaining with the creditors.
Whether the posturing of the new Greek negotiating team will succeed in getting a better deal in restructuring its debt depends mostly on the configuration of European politics. On the one hand, there is a growing sense—outside Germany—that austerity has reached its limits, deflation is knocking on Europe’s door, which caused the ECB decision to pursue quantitative easing against German Chancellor Angela Merkel’s will, growth has stagnated and many Europeans admit that the problem is structural. On the other hand, many analysts rightly point out that, European leaders, who support austerity politics are unlikely to approve a write-off or restructuring of Greek debt, fearing that such a move will help anti-austerity parties come to power in other countries of Europe, such as Spain or Ireland, and ultimately also ask for more. This is one of the largest cause for concerns and the buzz in Europe at the moment.
French President François Hollande appears to be ready to operate as an arbitrator between the two sides. President Obama recently entered the debate, suggesting that Greece needs growth, not more austerity. Even Greece’s allies who are against austerity recognize the need for reforms to ensure competitiveness and growth. SYRIZA’s economic program, however, includes things, such as raising the minimum wage and holding off privatizations, which may hinder growth. In the end, the two sides may compromise on an extension of the repayments that will be linked to a growth quota. The key question is whether Tsipras and his team will manage to create a coalition of European leaders to fight the austerity consensus.
The negotiation tactics of the Greek government and its creditors occupy the attention of news agencies. Before the elections took place, the consistent message from EU officials was, “we will give you some time, we will negotiate—short of debt restructuring not to mention write off—but you need to keep your word and keep making reforms.” Austerity is still the recipe relentlessly propagated by the dominant German coalition. Professor Yanis Varoufakis, the new minister of finance has made a sensation with his statements—for example, following his recent meeting with Jeroen Dijsselbloem, president of the Euro group and the European Stability Mechanism (ESM) board of governors, he declared that the new Greek government will not cooperate with the troika of lenders but will only talk to official EU institutions and the IMF. Many believe that this meeting set the stage for the next steps while others see it as taking Greece’s position going backward amongst its neighbours.
In the meantime, Tsipras will have to engage in a balancing act of herculean proportions to successfully renegotiate Greece’s bailout involving the European leaders and institutions, SYRIZA’s parliamentary group, and the junior coalition partner. At the same time, he will also need to manage the tensions between the high expectations that SYRIZA’s electoral campaign promises have produced and the reality of Greece’s tight budget. As time is of the essence with the impending sizeable debt repayments and the underlying problems of the Greek economy (the debt per capita/person in Greece currently stands at an alarming level of 38,444 Euros- low competitiveness and tax evasion – just skipping through all these issues is not an option. If Tsipras pulls this off then he may dominate politically in Greece, and other European economies may follow suite with similar anti-austerity governments. If he fails, a Greek exit from the euro zone with all of its consequences becomes a real possibility.
By Mishel Ali Khan
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