Like many, I’ve been excited to follow Greek coalition party Syriza’s rise to power these last few months, especially their victory at the polls on January 25th. A lot of the speculation I’ve seen in the blogosphere has to do with the EU’s reaction to their anti-austerity agenda, which includes wanting to write down their debt and reverse some of the brutal and, from what I’ve heard, counter-productive austerity measures. Still, all I’ve seen from the party is a desire to remain in the Eurozone while negotiating better terms with Brussels and Germany.
So, if Syriza isn’t threatening to leave the Eurozone, what are the real threats here? Will they get kicked out? I’m having trouble discerning between anti-leftist / anti-Greek humbugs and genuine economic concern. What would you see as an ideal yet realistic path out of austerity for the country?
Anti-Austerity Anne, Philadelphia
Dear Anti-Austerity Anne,
Like you, I’ve been following the inspiring developments in Greece relatively closely and haven’t always been able to discern between rhetoric and conditions on the ground. After opening a dangerous number of tabs in Google Chrome, I’ll do my best to summarize what I’ve read and add a few observations.
For those who have not been following closely, Syriza is a coalition leftist party that won 36.3 percent of the vote in elections on January 25th, taking 149 seats in the 300-seat parliament. Without an outright majority, the head of the party, Alexis Tsipras, formed a coalition with the populist right-wing Independent Greeks party, which has 13 seats in the new parliament. Despite significant differences, the government is united by its desire to end austerity, which is a term used to describe the ideologically motivated mix of budget cuts and social state reforms that often get forced onto countries as economic medicine. A member of the left flank of Syriza, economist Costas Lapavitsas, recently described Greek austerity as a “silent humanitarian crisis,” noting, “GDP has contracted by 25%, unemployment has shot above 25%, real wages have fallen by 30% and industrial output has declined by 35%.”
The new government is working to renegotiate its debt payment plan and reverse the “memorandums of understanding” that cut pensions and wages, increased taxes, and slashed the social state. On the other side of the negotiating table sit the European Commission, the European Central Bank, and the International Monetary Fund (a.k.a the “troika”). For a detailed, and jargon-laden internal history of the troika’s policies, see here. Another important player is the people of Europe, seeing as the troika’s authority to inflict austerity comes from the idea that citizens in richer European countries do not want it to end.
The next big deadline is February 28th, when the troika is set to determine if Greece is doing a good enough job following through on the memorandums. The parties need to reach an agreement before then unless there is an extension.
It is true that the troika has a lot of cards in its hands. In addition to holding the purse strings, 74 percent of Greeks do not want to leave the Euro, and it has more tools to deal with Greek exit now than it used to. But Syriza has two points of leverage worth noting: democracy, and the failures of austerity as an economic recovery policy.
As for the economics, it’s important to first describe the limitations of the Euro. Somewhat surprisingly given the polarization I tend to assume from economic debates, you can find people from across the political spectrum who will argue that the structure of the Euro was a raw bargain for many periphery countries from the start. Klaus Busch argues that there are four basic structural problems: monetary union without full economic union, lack of political union, focus on austerity, and incentives to destroying the social state. I recommend his explanation (pages 4-6), but a short summary is that creating a monetary union without other basic guarantees between states makes the system unstable.
For example, it is a problem that Greece has given the ECB control over monetary policy, which is when a central bank changes the amount of money in an economy to fight downturns or keep it from growing too fast. This would be less of a problem if Europeans with power in richer countries had more of an appetite to make sacrifices in order to help struggling countries like Greece. Similarly, one of the basic ways that economies adapt to crises is by letting the value of their currency fall, which makes exports cheaper. Because Greece does not have its own currency, this option is off the table.
The next big economic question to tackle is on the consequences of Greece exiting the Euro. The problem with trying to answer this question succinctly is that there are many different ways that Greece could exit. Generally, commentators seem to agree that the more an exit can be “managed,” the less damage it will cause in Greece and the rest of Europe. According to the Economist in 2012, “A precipitous exit without preparation would leave the country without notes and coin. The surrounding chaos would paralyze economic activity, causing consumers and businesses to stop spending.” Once there is a new currency to spend, other commentators worry about inflation (rising prices) and reactions to the devaluation (falling value) of citizens’ bank accounts (because without other measures, the ability of citizens to use their bank accounts to purchase exports would fall with the new currency in relation to the Euro). In contrast, Europe faces the threat of the crisis spreading both economically and politically as well as the loss of debt on Greece’s balance sheets, of which at least 77 percent is held outside of the private sector.
Almost by definition, a poorly managed exit would be bad for Greece in the short run, partially because without certain preparations, markets can make life very difficult for governments that they do not trust to support the interests of capital (i.e. leftist ones). Still, even a poorly managed exit could be better for Greece in the long run, but rather than delve into some deep uncertainties, it seems worth focusing on what a better exist could look like. For example, Stanislas Jourdan, describes how Greece could nationalize the banks, offer specialized banking licenses, and give citizens money to bolster a new currency as well as people’s wallets. In contrast, Roger Bootle and others offer less radical measures including preparing in secret, capital controls, and defaulting on much of the debt.
But what if a deal could be reached? A recent Center for Economic and Policy Research (disclosure: where I worked as an intern) paper argues that moderate fiscal stimulus could seriously help struggling Greeks. This partial reversal of austerity would be very difficult for the troika to swallow, but if the Greek government was allowed to pay back its debts over a more reasonable time frame, this solution could prove to be a partial success for Syriza and Europe.
If Syriza cannot reach a meaningful deal with the troika, then I’m of the opinion that they should carefully default. The party was swept into power with the slogan “Greece goes forward—Europe is changing” assuming that the troika would eventually bend to a government with a strong mandate from the people to end austerity. Currently, PM Alexis Tsipras is working hard to calm markets and signal his government’s intention to keep Greece in the Euro. Given Greeks’ current desire to stay in the Euro, this capitulation seems like it could be a political move to appear like a good partner now in order to justify harder bargaining or an exit later. Because Syriza needed to campaign on staying in the Euro in order to come to power, Tsipras cannot pivot until/unless the troika has demonstrated that Europe is not changing.
In your submission, you also questioned whether Syriza has any bargaining power if they are not currently threatening to default. While this is the line coming from the left flank of Syriza, who wants to see a pivot from Tsipras, succession is only one powerful tactic. Specifically, one wild card seems to be how much pressure people in Greece, around Europe, and throughout the world can create through various forms of protest. If huge numbers decide to act in solidarity with Greeks, it will become increasingly clear that the only legitimate resolution is an end to austerity. Considering, how many peripheral Euro countries in various states of crisis reacted positively to the Syriza victory, there’s a chance that the people demand a just solution that leaves the Euro intact.
Similarly, because austerity policies are deeply enmeshed in international institutions, people around the world would see huge gains from a Syriza victory. As with all solidarity actions, protesters could seriously benefit from a dent in austerity and global capitalism more generally.
On a final note, it is worth noting the performative nature of political economy and how rhetoric deeply shapes the conditions on the ground. So many of the potential solutions and pitfalls revolve around how different participants frame them. For example, one way to create space in negotiations for a just resolution is for people in Greece and around the world to continue to turn up the volume.