While Europe relaxed during their Christmas holidays, Greek MPs were unable to elect a new President and a general election has been called for January 25. The opinion polls show Syriza, the radical left party, with a 3% lead. The Greek parliament has 300 MPs, 250 of whom are elected on a proportional representation basis, but the other 50 are awarded to the party that wins the greatest share of the vote.
In recent weeks, Syriza have been toning down their aggressive rhetoric about unilaterally defaulting on Greek government debt, possibly in a bid to gain more moderate votes. In addition, if the current polls are correct, Syriza will not achieve a majority of 151 MPs and will thus need to enter into a coalition with a more moderate party. Markets have thus become a little more hopeful that another Greek financial crisis will be avoided.
Syriza’s economic policy has 3 strands:
- A restructuring or forgiveness of much of the EUR 370 billion debt owed by the Greek government;
- An end to the austerity measures and increases in wages, pensions and benefits throughout Greece, and an end to the Troika (the IMF, ECB and EU) oversight of Greek economic policy;
- Remaining in the euro.
The first could be easily conceded on pragmatic grounds: 80% of the debt is owed to the Troika and it is generally accepted that most of it is unlikely to ever be repaid. However, politically, any formal restructuring agreement could set a precedent that Ireland and Portugal might be keen to emulate, and thus be unappealing to the Troika (and Germany in particular, who have effective veto power here).
The second and third are not acceptable (to the Troika) as a pair. If Greece wishes to remain in the euro (and polls show over 70% of Greeks do wish to stay in the euro) then limits to government spending and deficits are part of what is required of all countries.
In recent days senior German politicians have made it clear that they would not be unhappy if Greece decides to leave the euro. Documents from the 2010-11 crisis that have recently become public show that many in Germany would have been quite happy not to rescue Greece and force it out of the euro back then, but it was Angela Merkel that ultimately decided the contagion risks of a Greek exit were too high. This time around the contagion risks are generally believed to be very much lower, thus it is generally felt that the eurozone could let Greece go without a wider crisis.
So the end of January and early February are likely to see negotiations to form a Syriza-led government, while the end of the March is the deadline by which a new agreement with the Troika over Greek austerity is due. Either Syriza or the Germans will have to blink first!
