Greece’s Fiscal Odyssey

By Maria Petrakis 

Mar 6, 2015

Greece has finally emerged from the recession that shrank its economy by a quarter, tripled unemployment and threatened to tear the euro zone apart in 2012. But the struggle over its finances isn’t over. A protest party that came to power in January has put Greece at the center of a European conflict once again. The party, Syriza, campaigned on a promise to undo the harsh economic medicine that was the price for loans that kept the country from financial collapse when years of hidden deficit spending came to light. To richer northern countries, Germany in particular, Greece is a spendthrift that won’t reform without continued pressure. To many Greeks, their travails have shown the limits – or even folly — of the austerity imposed on it and other ailing economies like Portugal, Spain, Ireland and Italy. Greece’s new leaders were quickly forced to backtrack on some of their biggest promises. But if they succeed in reviving the economy their success may echo on a continent mired instagnation.

The Situation 

Syriza, an acronym that stands for Coalition of the Radical Left, finished first in elections held on Jan. 25. The party’s 40-year-old leader, Alexis Tsipras, formed a coalition with another anti-austerity party after ousting the New Democracy party of Prime Minister Antonis Samaras. Tsipras campaigned on a promise to write off some of Greece’s roughly 320 billion euros of debt and unravel reforms that were a condition of receiving financial aid from the European Union and International Monetary Fund. In office, Tsipras reversed course after a writedown met almost unanimous opposition within the EU. With a cash crunch looming — the European Central Bank turned up the heat by restricting Greek access to its financial system — Greece scaled back its demands. After running into adamant opposition led by Germany, Greece won agreement for a four-month loan extension, but only on the condition that it hew closely to the existing bailout plan. While Tsipras hailed the concessions Greece managed to win, the deal meant months of struggle lay ahead, both with the country’s eurozone partners over any further loosening of austerity and with the impatience of its supporters.

The Background 

Syriza’s victory marked an end to a 40-year era in which Samaras’s New Democracy party and the socialist Pasok founded by Andreas Papandreou traded power after the ouster of a military junta. 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 down100 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.

The Argument 

Even most austerity-weary Greeks don’t want to give up the euro, according to polls. But the country’s creditors have taken an unyielding line on the debt forgiveness sought by Syriza. Many economists agree with Tsipras that the country’s debt is too large for it to pay, although there was 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. Tsipras’s promise to crack down on wealthy tax cheatswas the only part of his platform to play well both in Athens and Berlin. His leverage in debt negotiations appears to have been weakened in part by the work that’s been done strengthening the European banking system since the height of the euro crisis in 2012. The fact that Spain and other indebted countries are doing better also doesn’t help Syriza. Its election victory, especially if it leads to a relaxing of austerity, couldembolden 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 austerity policies imposed as part of their own bailouts. That may be part of why Europe’s establishment closed ranks against a writedown. 

THE REFERENCE SHELF 

A guide to the Greek political parties by Bloomberg News. 

The European Commission’s guide to financial assistance to Greece. 

The International Monetary Fund’s page on Greece. 

Bruegel, a Brussels-based think tank specializing in economics, has an assessment on EU-IMF assistance to euro-area countries. 

A Bloomberg View editorial recommends a final act to avoid Greek tragedy. 

The Bank of Greece summarized its Chronicle of the Great Crisis from 2008 to 2013. 

The Hellenic Foundation for European and Foreign Policy has a crisis observatory page.