What the Greek Elections Might Mean for Economic Liberty?

With the Greek parliamentary elections being only two weeks away, it seems that the opposition leftist party SYRIZA is set for a victory on January 25. The most recent polls show that Alexis Tsipras’s party continues to hold the lead with 2 to 4 percent, even though the difference with the New Democracy is shrinking.

SYRIZA has already proposed a controversial economic program that it plans to implement once it comes to power. The program, which was first introduced by Mr. Tsipras in 2012, mainly focuses on negotiating a write-down of the Greek government debt, and reversing austerity imposed by Antonis Samaras’s government as part of the Greece’s bailout agreement. According to Costas Lapavitsas, a London-based Greek economist and SYRIZA’s economic advisor, in a revealing interview with the BBC, “both of these things are very sensible—basically mild Keynesianism.”

The self-described “anti-austerity” party claims that government debt, which accounts for more than 300 billion euros, is not sustainable, even though its service cost is going to be just 4 percent in 2015, which is much less than what other European countries are paying. Moreover, based on NYU Prof. Nicholas Economides’ calculations, the average interest rate on 250 billion euros debt to the EU Troika is only 1.82 percent with exemptions, such as no interest payments on 60 percent of the debt for 25 years and no interest payments on 20 percent of the debt for 13 years.

The leftist party also argues that austerity measures forced by the Greek creditors, mainly Germany, suppress economic growth and deteriorate debt sustainability. Mr. Tsipras, as a “mild Keynesian,” is certain that the crisis is caused by insufficient consumer demand, and therefore greater social spending together with private debt restructuring would allow Greece to attract private investment and encourage fast economic recovery. The party promises to restore public spending to pre-2012, and in some cases even pre-2009 levels. The 11.5 billion euros worth of social spending programs would increase pensions and minimum wages, cover food stamp and state housing programs, subsidized electricity, transportation, and healthcare.

Additionally SYRIZA plans to reverse Greece’s privatization program, reinstate some of the fired public sector workers and cancel the special heating gas tax. What is interesting is that SYRIZA promises that the program can be implemented without running a fiscal deficit, arguing that after the write-down Greece would not have to sustain such large budget surpluses.

The program was met with a lot of criticism, especially from the Finance Ministry, which concluded that it is based on a poor understanding of economics. The increase in public spending and wages would lead to large external deficits, higher labor and production costs, and a huge loss of competitiveness. Thus, instead of attracting private investment SYRIZA’s policy would result in capital outflow.

Another important concern is the program’s funding gaps. The Finance Ministry report states that SYRIZA’s economic program is more costly than the party claims, and it would actually increase the primary budget deficit to 9 percent compared to the current 1.5 percent surplus. With debt negotiations taking place between Greece and the Troika, SYRIZA would face some serious financing problems. The European partners would refuse to lend on favorable conditions, and the recent surge in bond spreads shows that it would be difficult to rely on the markets.

Despite Mr. Tsipras’s claims that SYRIZA is committed to keep Greece in the Eurozone, failed negotiations with the Troika might provoke a deliberate or unintentional “Grexit,” or Greek exit from the Eurozone. Last week the German government and the EU Commission announced that they expect Greece to remain in the Eurozone and respect its obligations to EU partners. It is unlikely that Ms. Merkel will agree with any drastic haircuts that SYRIZA is demanding. If Germany decided to give in, it would affect Europe’s fiscal discipline and encourage other PIIGS countries to renegotiate their debts. Moreover, it would increase the popularity of other leftist “anti-austerity” parties, and provoke unrest in rest of the EU countries.

On the other hand, Greece’s exit from the Eurozone would mean the country also has to leave the EU and return to the Drachma, which would lead to an automatic default on its euro debt. Even though this time Eurozone banks are not exposed to Greek government bonds, and Greece’s debt to the major EU partners accounts for only more than 4 percent of the Eurozone government spending, the actual cost of Grexit would be much greater. The most serious consequence would be uncertainty over the Eurozone, followed by a drop in investment and higher interest rates. This would suppress already stiff EU growth and endanger the single currency union.

The outcome of the upcoming elections is uncertain. The fact that the governing New Democracy was able to reduce the difference in polls so significantly suggests that Greeks might still end up choosing the devil they know. However, in the event that the actual elections follow the recent polls, SYRIZA will secure 140 seats, while the New Democracy will get 80 seats in a 300-seat House. This means that even the wining party will have to look for coalition partners in order to be able to rule, which could limit SYRIZA’s ambitions to introduce radical reforms. Regardless of SYRIZA’s future plans, it is safe to agree with the chief political analyst at Citigroup Tina Fordham’s statement that the biggest implication of a SYRIZA win would be an extended period of political uncertainty in Greece, as well as in the rest of Europe.