Pushing Back Against Austerity

By Maria Petrakis, Bloomberg
Greece has finally emerged from the six-year recession that shrank its economy by a quarter, tripled unemployment and left medicine in short supply. But the struggle over its finances isn’t over. In the years since it announced that hidden deficit spending had left the country broke, Greece has been a flashpoint in the European Union’s broader economic debates as well as a practical problem for the countries that banded together to adopt the euro.
 
To richer northern countries, Germany in particular, Greece is a spendthrift needing harsh economic medicine. To many Greeks, the depth of their travails has shown the limits – or even folly — of the spending cuts and tax increases pressed on it and other ailing economies like Portugal, Spain, Ireland and Italy. In 2012, conflicts over Greece’s debts threatened to tear the euro zone apart. Now, another Greek political crisis is echoing on a continent mired in economic stagnation. A change in Greek leadership isn’t expected to threaten the end of the euro, but could be the start of a broader revolt against austerity.
 
The Situation
 
Greece scheduled a snap election for Jan. 25 after Prime Minister Antonis Samaras gambled and lost in a parliamentary showdown. Polls have consistently showed the anti-austerity protest party Syriza as the favorite. Syriza’s 40-year-old leader, Alexis Tsipras, has promised to write off some of Greece’s roughly 320 billion euros of debt, most of it owed to the European Commission, the International Monetary Fund and the European Central Bank, known as the troika. Samaras campaigned on warnings that a Syriza victory could lead to Greece being forced to leave the euro. The prospect of a so-called Grexit drove up yields on the country’s bonds but didn’t appear to alarm Greeks used to years of chaos. As election day approached, Tsipras stressed that he would work to stay in the euro while rolling back troika-forced cuts and taxes. German officials said they would refuse requests for debt forgiveness or to end economic reforms, but would be open to talks on easing repayment. The European Central Bank suggested that Greece could be included in its new bond-buying program, but only if it continues to work with the troika. In a sign of Syriza’s wider appeal, the leader of Spain’s anti-austerity party, Podemos, planned to join Tsipras for the campaign’s final rally.
Source: Bloomberg Source: Bloomberg
 
The Background
 
Samaras’s New Democracy party and the socialist Pasok founded by Andreas Papandreou have traded power for most of the 40 years since a military junta was pushed out. The parties’ competition for votes led to a spending spree financed by international debt while tax evasion flourished. In 2009, Papandreou’s son George took power and revealed a deficit that was four times what the euro rules allowed. Greece received a total of 240 billion euros in EU and IMF funds to stay afloat. It also forced creditors to write down 100 billion euros of privately held bonds. In return, in addition to spending cuts, the country’s lenders have pushed for an overhaul of everything from labor rules to taxi licensing. In 2013, the country achieved a budget surplus before interest payments, one of the conditions set for possible concessions on its debt, which grew to more than 170 percent of GDP as the country borrowed more and the economy shrank. The economy is forecast to grow 2.9 percent in 2015, and in 2014 youth unemployment, which had peaked at over 60 percent, fell to about 49 percent.
Source: Eurostat Source: Eurostat
 
The Argument
 
Even most austerity-weary Greeks don’t want to give up the euro, according to polls. But the country’s creditors have shown no interest in the debt forgiveness sought by Syriza, an acronym that stands for Coalition of the Radical Left. Many economists agree with Tsipras that the country’s debt is too large for it to pay, although there’s far less support for his call for new populist benefits like free electricity. The party’s argument that austerity has made things worse instead of better has struck a chord with the public, but for many Greeks his main appeal is that he is not one of the country’s too-familiar faces. The fact that Spain and other indebted countries are doing better could weaken Syriza’s leverage in debt negotiations if it wins. But a Syriza victory could also embolden protest parties like Spain’s Podemos or Sinn Fein in Ireland that are challenging their country’s established parties, all of whom had a role in the tough — and increasingly unpopular — policies imposed as part of their own bailouts.