Greek politicians of almost all persuasions were forced into ignoring the people’s verdict and their demand for a fairer economic adjustment regime because the alternative of leaving the Eurozone appeared too draconian.
The recent elections in Greece that brought the radical left Syriza party into power under its youthful leader Alexis Tsipras, 40, now Greece’s new Prime Minister (PM), is creating political vibrations in the European Union (EU), thus raising concerns about the Eurozone with a common currency for its 19 member states. Greece is a member of the Eurozone, probably the sickest with its enormous debt. It has become a laboratory of sorts to test the efficacy of a comprehensive austerity strategy to cure its economic malaise. However, despite all the cost cutting measures over the last few years, leading to huge job losses, cuts to health, social welfare and related services, the country is nowhere near economic recovery or even showing signs of it. Indeed, the unemployment rate is still hovering at around 25 percent, with youth unemployment upwards of 50 percent.
When the Greek people voted for the Syriza party, they were essentially voting for hope that the new radical left outfit might miraculously bring about an end to their economic misery by renegotiating the country’s debt, possibly its write off by half. This would mean a significant reduction in interest payments, creating space for economic stimulation and a momentum for growth. However, subsequent negotiations with the troika of the European Commission, European Central Bank and International Monetary Fund did not go anywhere. Germany, Europe’s strongest economy, was adamantly against any change to the bailout package, insisting on the old austerity regime and other member states rallied behind it. Therefore, even though the existing bailout has been extended for four months, thus saving Greece from a possible default, there does not appear to have been any softening of terms. Whether there will be any modification in the days to come seems very unlikely or, at the most, marginal. Indeed, the whole deal could still fall through if the troika were not satisfied with the Greek government’s follow up measures.
Greece’s new government disagrees fundamentally with the troika’s prescription of putting Greece on an economic diet to restore its ‘health’. Before the 2009 financial crisis, Greece was certainly living on borrowed money from EU banks that created an economic bubble. Indeed, it was part of the global financial crisis that started with the US and then spread to Europe. The US and EU financial architecture was like a pyramid scheme where dodgy financial instruments of all sorts were circulating, creating an illusion of prosperity with very little transparency and a widely shared belief that the economic merry-go-round had acquired its own never ending momentum. However, when the chips were called in and there was not much cash in the kitty, unsurprisingly the financial dominoes started to fall in the US and in Europe.
But when it came to devising an economic architecture to deal with the financial meltdown and its disastrous impact on people’s lives, the US and Europe broadly followed two different approaches. In the US, the government used public funds to bailout some of the big banks and financial institutions to keep the system working lest everything come crashing down. At another level, billions of dollars were poured into stimulating the economy. At the same time, the country’s federal reserve cut down the cash rate (at which banks do transactions between them) to zero and put even more money into the economy by what came to be called quaintly quantitative easing. In other words, printing ever more money to oil the wheels of a sick economy. The result of it all in the US has been patchy, though some sectors of the economy seem to be showing positive results.
The EU, by and large, followed a conservative approach, forcing its highly indebted member countries, with Greece on top of the list, to put their economic house in order by massive economic retrenchment to bring down their debt and budget deficit within certain limits over a period of time. To tide over the crisis, Greece was given bailout packages to run the country under broad troika supervision. In the process, successive Greek governments were told that, irrespective of the electoral verdict against a severe austerity regime, they were required to carry out the troika’s demands or else they might not receive the necessary bailout to run the country. In other words, the troika’s dispensation was more important than any outcome of democratic elections. Greek politicians of almost all persuasions were forced into ignoring the people’s verdict and their demand for a fairer economic adjustment regime because the alternative of leaving the Eurozone appeared too draconian, with virtually no access to international finance. The option of defaulting on its debt would put Greece in an isolation ward, economically speaking, with unpredictable and certainly unpleasant results.
The new government in Greece is keen to explore alternatives that would restructure its debt radically to reduce repayment obligations but still remain in the Eurozone. Greece badly needs to revive its economy through a stimulation programme rather than an imposed austerity package that seems to be making things worse. The question then is: will the EU relent and write off a substantial part of Greece’s debts? For this to happen Germany, as the Eurozone’s strongest economy with a large part of Greece’s debt owed to German banks, would play a determining role. Any write off of these debts will require a German government to bailout its own banks with its taxpayers having to ultimately foot the bill. Germany, backed by The Netherlands and Finland, particularly, as well as other Eurozone members, opted for toughness. And it has prevailed so far with the new government in Greece forced into continuing the old austerity regime or else be forced out of the Eurozone.
That alternative would throw Greece into uncharted waters. But this would also be damaging for European integration, slowly and painstakingly built over several decades to foster European unity. Even though Europe’s political integration as a pan-European entity has so far eluded the continent, it certainly made considerable progress, weaving together 19 European economies into a common market with a common currency, until the global financial crisis hit it with enormous debts of some of its members, with Greece as a stand out example. The recent elections in Greece have shown that its people do not like being made an example, as they believe, for the collective sins of the Eurozone. While Greece’s governments were on a borrowing binge, the European banks could not escape blame for irresponsible lending without any questions asked. In other words, it takes two to tango. Without easy lending, Greece would not be in the situation it is today.
Such finger pointing, however, is not helpful when there is need to find a solution to ward off a serious crisis, which has the potential of unravelling the EU. The four-month extension of the bailout, if carried out, might buy time to accommodate Greece in such tough economic times. Greece was hoping to rally support from some fellow member states but that was not forthcoming. Its government and the people, even under great economic distress, do not want to quit the Eurozone to tread their own solitary path to what might even be a riskier course.