Syriza Rolls the Dice
Greece's new government rolled out its audacious plan to drag the country out of austerity. It might be in for a rude awakening.
The coming out party for Greece’s new government didn’t go off as planned. Freshly appointed Finance Minister Yanis Varoufakis, who was sworn in just two weeks ago, bombed in London, Berlin, and Brussels. He’d arrived with a plan for Europe to give Greece a three-month holiday, during which it would abrogate the terms of the current 200 billion euro ($265 billion) bailout, make no economic reforms, insult the International Monetary Fund and the Germans who have been driving eurozone policy, and get better terms for its debt.
Prime Minister Alexis Tsipras, Energy Minister Panagiotis Lafazanis, and Varoufakis, also suggested Greece would break ranks with the other 27 European Union countries and refuse to extend economic sanctions on Russia. Speculation was rife among Europeans about whether the Greek position was simply an admission that Russia’s retaliatory sanctions have cut off a crucial export market for Greek farmers, a reflection of the far-left Syriza’s Russophile ideology, a ploy for a Russian backstop as money flees Greek banks ($11 billion in January alone), or an attempt to show EU governments that Athens could retaliate asymmetrically for a refusal to yield to their economic demands.
For the inexperienced politicians now running Greece — only one minister has served in government before — playing hardball with their creditors seemed like a solid plan. But as boxer Mike Tyson once said (and King’s College professor and master strategist Lawrence Freedman likes to quote), “everybody has a plan until they get punched in the face.”
In this instance, European Central Bank (ECB) President Mario Draghi, Dutch Finance Minister Jeroen Dijsselbloem, and German Finance Minister Wolfgang Schäuble did the punching, flat out rejecting Greece’s proposals. As a show of strength, the ECB disallowed the use of Greek bonds as collateral, raising the cost of lending and sending the Athens Stock Exchange into a deep dive. The head of Germany’s central bank ominously emphasized that with only a two-thirds majority of the ECB’s governing council, EU governments could vote to collapse Greece’s financial system by pulling Athens’s line of credit.
Perhaps the new ministers are political geniuses, getting their faces slapped to show the Greek public they will need to accept continued economic supervision — the very humiliation Syriza had been elected to reverse. It would be a smart way to condition Greeks to understand there is no alternative to paying up what they’ve been loaned. Indeed, the majority of Greeks want to remain in the eurozone. If even Syzria can’t get Europe to flinch, then Greece must bow to the economic inevitability and meet its creditors’ terms.
But that’s not the way the Syriza government is playing it.
On Sunday, Prime Minister Tsipras gave a stem-winder of a speech to his parliament, insisting that Athens doesn’t need a bailout extension, but demanding a “bridge program” for the EU and IMF to finance Greece until June — while also conceding to more lenient repayment terms. Tsipras wants Greece to issue more debt and reclaim from other countries the interest paid for holding Greece’s bonds.
Moreover, in his speech, Tsipras pledged to raise the minimum wage, make electricity free, and hire back 250,000 government employees who’d been let go as part of the austerity demanded by the ECB, IMF, and European Commission. Syriza’s only concession to EU resistance was slowing implementation of some elements of their campaign promises.
“Greece is no longer the miserable partner who listens to lectures to do its homework. Greece has its own voice,” Tsipras told the Greek parliament. It was a flagrant rejection of the constraints that hem in his government and a restatement of the same demands that Varoufakis took on a tour of European capitals last week, where they were met with hostility.
That’s a bold move for a country that has spent half its modern history in default, will run more than $10 billion short of cash this year, was just downgraded — again — by Standard and Poor’s, and whose financial lifeline ends on Feb. 28. It is also a surefire way to further aggravate the people bankrolling Greece’s government — that is, the rest of Europe.
Tsipras seems to believe he has support from the French and Italian governments for a southern-tier rebellion against northern Europe’s dour austerity demands — but both the French and Italian governments supported the ECB’s decision to stop accepting Greek bonds as collateral. Tsipras may be underestimating just how much those two countries need to keep investors from scrutinizing their accounts for similarities that could start spirals to higher bond yields and capital outflows.
Cutting a better deal for Greece is also opposed by Ireland, Spain, and Portugal — countries that were likewise tottering financially when the crisis hit Europe in 2008, but saw their austerity programs all the way through. If Greece succeeds in getting better terms on the basis of worse behavior, voters in all three countries would surely question why their own governments hadn’t defended them as well as Syriza. Which explains the EU governments’ adamant stance against Greece: they cannot afford a precedent of rewarding truculence.
Syriza likewise underestimates just how much work other EU countries and the EU institutions have undertaken since the last Greek crisis two years ago. Berlin has been constructing buffers to mitigate the effects of a Greek default, assessing and increasing bank capitalization, pulling Greek bonds from private banks into government coffers so the banking system won’t buckle, and aligning regulatory and institutional levers as shock absorbers. Greek turbulence has not infected other governments’ bond rates; Mario Draghi’s promise that the ECB will “do whatever it takes” to preserve the currency union has been taken seriously. Economic recovery in Ireland and other formerly troubled EU countries gives Europe additional resilience.
EU finance ministers meet Wednesday, and heads of government on Thursday. The Syriza government seems to be banking on EU heads of state being too fearful of a Greek default to risk forcing compliance. But the betting odds on a Greek default are now running 5:2. Put your money down now.
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