Analyst Marko Papic examines the implications of Greece’s internal political problems for the eurozone’s efforts to handle its member states’ debt crises.
The political crisis in Greece continued to intensify on Thursday with Greek Prime Minister George Papandreou fighting for his political life while the implications for wider eurozone politics continue to be daunting.
Greek Prime Minister George Papandreou is attempting to hold on for his political life as he is attempting to rein in backbenchers of his party, PASOK, who have indicated they will not vote for the upcoming austerity measures. In the last couple of days, Papandreou has offered, himself, to resign and to create a unity government with the center-right opposition. However this was only an attempted maneuver to outflank the opposition and illustrate to the Greek populace that, really, nobody other than himself is willing to rule at this very trying time.
Despite the political uncertainty, the protests on the streets of Athens, despite the media obsession about them, are actually not as violent as they had been last year at this time, or even at the end of 2008, when rioting in Athens and other Greek cities engulfed the nation. The protests could, however, intensify if the crowds on the streets of Athens sense that the Greek government does not have a hold on power.
The reason why domestic politics in Greece matter is that they actually paradoxically improve Athens’ ability to negotiate with its eurozone partners. Specifically, the worse the political situation in Athens gets, the more maneuver room Papandreou and the Greek government will have to negotiate concessions out of Germany and other eurozone member states. This is already evident because the IMF and the EU have indicated that they will forward the July tranche of loans to Greece even if Athens doesn’t pass any new austerity measures.
The bottom line is that the eurozone does not want Greece to collapse at this particular point, especially because France and Germany are attempting to come to an agreement on how to restructure the privately held Greek debt. And during this very sensitive time, the last thing anybody really needs is a new election in Greece or, even worse, complete social disorder on the streets of Greek cities.
What Berlin is trying to do is really circle the wagons around peripheral countries. But to do that, Germany has to keep in mind the rising populism and the anti-bailout movements not just in Germany, but also other countries that are responsible for bailing out the peripherals, such as Finland and the Netherlands. To do this, Berlin has committed to company bailouts by also putting the burden on private investors — essentially an anti-populist move. On the other hand, Germany also has to make the austerity measures painful enough for two reasons: one, to appeal to the anti-bailout forces within its own country; and two, so that it makes it quite clear to Portugal and Ireland and other peripheral countries that Greece is in no way getting a handout.
From the peripheral countries’ point of view, there is also a balancing game going on. Specifically, trying to prove to the eurozone core countries, such as Germany, that the austerity measures are harsh enough to cause political instability at home, because this increases their negotiating position and allows them to gain concessions back from Berlin and Paris. The bottom line is it is in nobody’s interest at this point to cause a collapse in the periphery — especially not in Greece. Therefore, our forecast is that Germany and other eurozone countries will give in to the crisis in Greece, and will forward whatever loans are required to get over this political crisis.
