Regardless of Syriza’s new mandate, Greeks are still in for more years of economic hardship.
- By Edward HarrisonEdward Harrison is the founder of the Credit Writedowns and a former career diplomat and investment banker. Follow him on Twitter: @edwardnh.
ATHENS — What’s next for Greece in its fight for fiscal and financial stability? In the wake of the decisive “no” by the Greek electorate in the referendum on a new bailout, as well as related events, the negotiating landscape has shifted substantially. The position of the creditor institutions — the European Commission and the European Central Bank, if not the International Monetary Fund — now looks untenable. But this in no way changes the potential outcomes for the Greek economy, which will still face either further harsh austerity or the turbulence of a eurozone exit.
Let’s remember the starting point here. In late June, after just over five months in power, the Greek government coalition, led by the Syriza party and its prime minister, Alexis Tsipras, decided that negotiations with the creditor institutions known as the troika — the IMF, the European Commission, and the European Central Bank — were at a standstill. Syriza wanted debt relief added to any package, because they believed the government’s debt burden was unsustainable. The institutions refused to broker this issue. What’s more, the institutions said that the chief Greek negotiator, Yanis Varoufakis, and his insistence on debt relief were the major impediments to a deal getting done.
The institutions and the Greek government were not that far apart on targets for the government’s budget balance, but significant differences remained on sacrifices by the working and middle classes versus corporates and the rich. The sides were also far apart on the reform agenda — including so-called pension and wage reforms, which have already taken a toll on older and poorer Greeks — as well as the need for immediate debt relief. As an example, the Greek government wanted to impose a one-time tax of 12 percent on corporate profits over 500,000 euros, but the institutions rejected it.
Wanting and needing a deal, Tsipras called a nationwide referendum on the last offer presented by the institutions, campaigning for a rejection of the offer but promising to sign a deal if the Greek people voted “yes.” But the Greek people voted “no” overwhelmingly.
This “no” vote changes the landscape for three reasons. First, in the wake of Syriza’s win, Varoufakis has resigned. The institutions can no longer insist that he is a stumbling block to agreement. Second, even before the vote, the IMF released a report that essentially vindicated the Greek negotiating position — that debt relief would be necessary to stabilize the Greek government’s fiscal situation. Former IMF official Ashoka Mody said that “the IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith.” Third, the “no” vote was so overwhelming — with a 22 percent margin against the troika’s position — that the next set of decisions by the troika will be seen as either backing the will of the people or overriding the wishes of a sovereign nation and violating the appearance of democracy.
These three developments do indeed strengthen the Greek government’s negotiating position, particularly given the new post-vote political framing that pits national sovereignty and democracy against the power structure within the European Union. If the institutions are now seen as running roughshod over Greece, it will have permanently negative consequences for the legitimacy of the European Union in a world where nationalism threatens to rip the EU apart.
But in terms of outcomes for Greece, I do not see the referendum as having made a big difference. Even if the European Commission, the European Central Bank, and the IMF capitulate and accept Syriza’s terms, austerity is still going to be the order of the day in Greece. And that guarantees continued pain for the Greek economy, including record levels of unemployment. This is the best-case scenario. Other scenarios include the European Central Bank cutting off Greek banks entirely, forcing a collapse of the Greek banking system and an eventual exit by Greece from the eurozone in an uncontrolled and catastrophic way. Though Grexit might seem like a victory for the troika’s negotiating position, it would devastate the Greek economy in the short term, as well as be the beginning of the end for the eurozone and European economic integration.
There are not a lot of good outcomes here. The eurozone remains in crisis. And nothing that happened on Sunday in Greece changes this.
Photo credit: Aris Messinis/AFP/Getty Images