The latest statements of the newly elected Greek government show that negotiations between Athens and the so-called “Troika” will not be easy. SYRIZA sent a strong signal to EU leaders, asserting that Greece will no longer tolerate externally-imposed austerity measures and demanding a write-down of what the party calls unsustainable debt. While the Greek government repeats that it wishes to reach an agreement beneficial for both sides, and EU continues to claim that it wants Greece to remain in the Eurozone, neither side has so far shown any sign of mutually-acceptable compromise.
Alexis Tsipras, the Greek Prime Minister and the leader of SYRIZA, has been quick to reassure his supporters that SYRIZA intends to keep its campaign promises. During the first cabinet meeting the ruling coalition stopped two big privatizations and is now moving towards reinstating fired public sector workers, and raising pensions and minimum wages. Mr. Tsipras plans to present the complete program to the parliament within a few days.
The Greek government has not wasted any time trying to fulfill its other major promise—the write-down of the Greece’s debt. Last Friday, following the meeting with the Eurogroup’s chief Jeroen Dijsselbloem, newly assigned Finance Minister Yanis Varoufakis announced that Greece will not take out any new loans to meet its future debt obligations. The anti-austerity minister claims that Greece is insolvent and refused to cooperate with the appointed inspectors overseeing the bailout program, stating that Greece wants to negotiate directly with the Troika.
Unsurprisingly, international lenders were not pleased with the position taken by the Greek government. In an interview to the Berliner Morgenpost, German Chancellor Angela Merkel said that she does not see further debt haircuts for Greece, as it has already been forgiven billions of euros by private creditors and banks. Likewise, Erkki Liikanen, a member of the ECB policymaking Governing Council, warned that if Greece fails to reach an agreement with its lenders, the ECB will be obliged to pull the plug on Greek banks. Without the liquidity assistance Greece would be forced to leave the Eurozone, especially since four major Greek banks have already lost a third of their stock value, and continue to face massive deposit withdrawals.
SYRIZA does not have much time, as the current bailout program is due to expire on February 28. While Greece might have funds to meet its obligations the next few months, in summer it will face around 10 billion euros worth of debt repayments. The sharp increase in borrowing costs ruled out funding opportunities from the financial markets, as Greek 3-year and 10-year bond yields reached 16.6 and 9.8 percent respectively.
Mr. Varoufakis has been busy visiting the EU countries and trying to gain support for Greek debt relief. To everyone’s surprise, during Monday’s visit to UK he suggested a swap of the Greek government bonds held by the ECB and part of debt owed to Eurozone lenders for growth-linked and perpetual bonds. Furthermore, the Greek Finance Minister called for a bridge agreement, which would ensure liquidity assistance to Greek banks, and would grant his government more time to settle a new agreement with its EU creditors.
Though some argue that this proposal could lower the likelihood of Greek default and promote more reforms, Eurozone officials were not impressed with the idea, claiming that there is no need for further financial engineering as Greece’s debt costs are already very low. Mr. Varoufakis scheduled meetings with the ECB president Mario Draghi in Frankfurt today, and German Finance Minister Wolfgang Schäuble tomorrow in Berlin, after which further details on the Eurozone’s position should emerge.
In addition to the previous objections, SYRIZA triggered another set of concerns when it officially opposed further EU sanctions against Russia for its aggression in Ukraine. The leftist party might view this as an opportunity to gain more bargaining power in the negotiations with Troika, since any penalty imposed by the EU requires a unanimous decision from all 28 countries. The EU members did not hide their disappointment over the new stance of Greek government, with Germany’s Foreign Minister Frank-Walter Steinmeier noting that it is not making the debate any easier.
While the Troika understands that a failure to reach an agreement can result in accidental Grexit, which would be equally detrimental for both sides, Germany is worried that any compromise reached in the negotiations will be at the expense of the German taxpayers, and would encourage similar demands from countries like Spain in the future. However, EU leaders must not forget that SYRIZA victory is the result of harsh fiscal austerity measures introduced ostensibly to save the Euro.
The previous Greek government failed to introduce pro-growth structural reforms that would have stimulated Greece’s economy, and instead, followed the conditions proposed by the lenders. Despite the primary budget surplus, the imposed policies did not result in lower unemployment or greater wealth for the Greeks. European Commission president Jean Claude Juncker admitted that what has been done over the recent years has not necessarily always taken account of growth, and the errors have to be corrected. Unfortunately, SYRIZA’s anti-austerity program also does not embrace the reforms that are necessary for Greece.
Even though most of the PIIGS countries are no longer vulnerable, and the risk of contagion is not as likely as in 2012, anti-austerity parties of both right and left are gaining support across the EU, e.g., Podemos in Spain and Front National in France. It is time for the EU to reconsider its austerity measures, and concentrate on promoting growth-enhancing reforms, such as reducing bureaucracy and corporatism, while reinforcing property rights and the rule of law. If SYRIZA agrees to those reforms, debt relief may be an appropriate price to pay.