January 28, 2015

Syriza Scenarios

Patrick Marren
Partner

A Greek election may offer a glimpse of the future - or a brief detour to a failed past.

This past Sunday, Syriza, the Coalition of the Radical Left, won a large victory in Greek parliamentary elections over the main establishment parties, the center-right New Democracy party, led by Andonis Samaras, the Movement of Democratic Socialists, led by George Papandreou, and the already shriveling Panhellenic Socialist Movement (PASOK), recently led by Evangelos Venizelos, and founded by Papandreou's grandfather. 

Syriza fell two votes shy of gaining an absolute majority of the parliament's 300 seats. Alexis Tsipras, Syriza's leader, quickly announced a coalition with a fairly hard-right party, ANEL, "Independent Greeks," known for its opposition to the terms of the European bailout, to gain a working majority. "Golden Dawn," Chrysi Avgi in Greek, a neo-Nazi party, moved up to third place out of seven parties with 6.3%, ahead of all but Syriza and New Democracy. 

Headlines around the world often included the words "radical" and "left," which is only fair, since those words appear in the name of the winning party. They also stressed that the election meant a showdown between Greece and "the troika," the threesome of the European Commission, the European Central Bank, and the International Monetary Fund. Germany, the largest economy in Europe and the largest contributor to previous Greek bailouts, issued mostly hard-line statements that Tsipras must live up to the terms of previous agreements, and that neither Germany nor the EU could be counted on to contribute any more money to ease the harsh economic situation in Greece. David Cameron, prime minister of the U.K., declared via Twitter, "The Greek election will increase economic uncertainty across Europe."

Tsipras, on the other hand, declared in his victory speech that "Greece will now move ahead with hope and reach out to Europe, and Europe will change. We will bring an end to the vicious circle of austerity."

On the one hand, Europe has lent a tremendously huge amount of money to Greece. The Troika has lent Greece 240 billion euros, some $271 billion at today's exchange rates (but far more under previous ones). That represents comfortably more than a year's per capita GDP for every man, woman and child in Greece - some $25,000 apiece. And it became clear early in the process that the Greek government had been seriously misleading the EU as well as the broader world financial community as to its solvency for some time prior to the outbreak of the crisis in 2009-10. 

On the other hand, it was a loan, not a gift. And the following conditions were demanded by the Troika in 2010 in order for Greece to receive the loans: significant cuts to public sector salaries and pensions; significant rises in the valuation of property for property tax purposes; large increases in Value Added Taxes applied to all consumer purchases; increase by 4 years in the average retirement age (to 65, it must be said); a two-thirds reduction in the number of public-owned companies; and a rationalization down from 1,000 to 400 municipalities in the country.

Things did not improve as a result of the first bailout package; quite the opposite. So a second round of loans was needed in 2011, and in order to qualify for these, austerity cut Greece more deeply. Private holders of Greek bonds were required to take a 50% "haircut" with yields reduced to 3.5%. Further drastic spending cuts, pension cuts and labor market policy changes worsened the lot of the average Greek. The results were continued economic shrinkage. The economy shrank by 7.1% in 2011, while the debt burden actually grew despite the absolute amount of debt declining. 

This graph shows the tragicomic results of the "troika's" estimates of the consequences of their ministrations. Every six months to a year, a new estimate would come out with a graph showing a downward-sloped GDP intersecting with the present, followed by a hockey-stick upward rebound as the estimates replaced the actuals. In 2014, real GDP growth finally occurred, but at an extremely low rate, and unemployment, expected by the troika to peak at around 15%, remains above 25% for the third consecutive year. For comparison purposes, unemployment in the United States in the Great Depression peaked at about 23% in 1933, but fell below 20% with a year or two.

What now?

Well, the troika has been sending signals for a while now that they are not in a mood to renegotiate the terms of the bailout. Alexis Tsipras has said that the era of austerity is over. Very Serious People the world over are saying that Greece would be thrown into a tailspin if it decided to withdraw from the euro and default on its debts. A new drachma, it is confidently asserted, would begin at par with the euro and fall by some 50% quickly. Imports (including oil and gas) would double in price. The government could not borrow to finance any shortfall. Greece's suffering would only increase.

On the other hand, as all good economists (and scenario planners) say, a lower drachma means increased exports, which means more jobs in Greece. In addition, Greeks aren't importing much (on a net basis) anyway at the moment, so the hit from higher import prices would be blunted (though energy certainly would be a problem). As for the government not being able to borrow, the budget right now is in primary surplus, which makes that less of a problem. 

One comparison that some people are raising now is Iceland. Iceland had, on a per capita basis, one of the steepest and most explosive boom/busts of all time. At the end of the second quarter of 2008, after Iceland had put its major banks into receivership, its external debt was valued at about 50 billion euros, compared to a gross domestic product in 2007 of 8.5 billion euros. The total owed to foreigners was about 6 times the entire national income. 

The big differences from the Greek situation were that (a) the Icelandic debt was monumentally larger on a per-capita basis; but (b) Iceland had its own currency, the krona. So Iceland put the banks into receivership, hived all the debt owed to and assets owned by foreigners off from domestic assets, and put all the foreign debts into receivership and liquidation. In other words, the average Icelandic citizen was not asked to foot the bill for any of the banks' unwise lending practices; the entire brunt of the losses was borne by foreign investors and speculators, many in the UK and Netherlands. (A $5 billion loan from the IMF and a group of Nordic countries, and $1.2 billion more from Germany, the per-capita equivalent of about $180 billion lent to Greece, also helped.) 

Iceland's currency did fall by 50%, as Greece's is expected by some to do, should a "Grexit" from the euro take place. And its economy shrank, and its stock market lost 90% of its value. Capital controls were put in place to keep hard currency at home. By 2011, economic growth had resumed; by 2012, Iceland began to pay down its debt to lender countries. Unlike Greece, Iceland refused to enforce austerity on its people; instead of reducing benefits, it placed the entire burden of the crisis on foreign speculators. As a result, Iceland did not see any increase in poverty, homelessness, or suicide, and its unemployment rate, after peaking at over 9% in late 2010, has steadily declined to about 4% since. 

Greece, of course, cannot allow its exchange rate to decline, since its exchange rate is currently controlled by the European Central Bank, which is dominated by the Germans, whose antipathy to inflation, popularly assumed to result from the 1920s hyperinflation of the Weimar Republic, is legendary. So it cannot inflate away its debt. Nor can it hive off its domestic debts/assets from its foreign-owned debts/assets; if there was ever an opportunity to do that, it is long gone. Greece also has the knowledge that its problems are in a sense self-inflicted, because unlike Spain or Ireland or Iceland, its government is seen as actively deceiving the rest of the EU regarding its solvency. 

But economics is not a morality play. At current anemic rates of growth, Greece will never get out from under its debt burden, nor ever again approach its pre-crisis "normal" growth rate, whatever that might have been in the absence of fraud. That's not just bad for Greece, it's bad for people owed money by Greece, including the Germans and French.

So in this game of politico-economic chicken, there is some reason to believe that the two sides do have some interests in common. Negotiations on altering the debt terms will undoubtedly take place. Presumably the troika will be prepared to give some concessions. There is no guarantee that they will be enough to allow Greece truly to escape its fiscal-economic double-bind situation. So several basic scenarios are plausible:

  • PYRRHIC VICTORY: The Greeks accept the minimal concessions offered by Merkel and the troika. They are not enough to propel Greece into real economic growth. But they are just enough for Alexis Tsipras to claim he has faced down Greece's tormentors, and the Greek people accept a low but positive economic growth rate as the best outcome they could expect.
  • ALEX THE NOT-SO-GREAT: Greece and the troika fail to reach a workable compromise. Greece remains in the euro, as Tsipras promised, but the Greek economy suffers. The fickle Greek electorate throws Syriza out of power and leftist approaches are discredited. The Greek economy stumbles along, with no recovery but no depression either; hard-right parties start to look even better (remember, the neo-Nazi Golden Dawn finished third in Sunday's election with 6.3%).
  • REVENGE OF THE PIIGS: Tsipras successfully organizes an alliance of the "PIIGS" (Portugal, Ireland, Italy, Greece, Spain) to force changes to the austerity program of the European Central Bank and across-the-board easing of the bailout packages enforced upon those countries. France might actually be open to this approach; if France can be persuaded, Germany may have little choice but to change course.
  • SOUTH ICELAND: The troika stonewalls Greece, or Greece refuses the concessions offered; so Greece decides to exit the euro. In this case, we might expect an initial further hit to the Greek economy, followed by a more significant recovery later on. But the continuation of Greece in the European Union would be in serious doubt.
  • EXOGENOUS FACTORS: Something else happens that overshadows this dynamic - a huge natural disaster, a war, a sudden economic boom, another financial meltdown that puts the Greek situation into the shade and makes its resolution part of a larger framework.

An often-underappreciated aspect of this situation is that Europe may well have dodged a bullet, thanks to the sudden drop in energy prices. Greece is an Orthodox Christian country. A year ago, there was reason to believe that it was drifting into the orbit of its fellow Orthodox Christian country, Russia. With ongoing economic devastation and high energy prices, Greece was being shoved toward accommodation with Vladimir Putin: both temperamentally through perceived its abuse at the hands of its old enemy, Western Christian Germany, and France ("the Franks" is the term used by Greeks to describe the non-Orthodox Christians of Western and Central Europe); and economically, through its need for cheaper energy in a high-oil-price world. Various pipeline ideas were being discussed, and presumably more substantive ties might have followed.

For better or worse, the "Orthodox option" has declined markedly in value for the Greeks in the past few months. The Balkan Orthodox countries and Russians were probably not a huge threat to replace NATO or the EU as the center of gravity of Eurasia, but such an alliance of the disaffected could have caused some serious friction for Europe and the United States. (Just ask Georgia or Ukraine.)

Brussels probably does not appreciate just how lucky they are. 

Comments  | 

pmarren
Interesting development today: the new Syriza government was accused of cozying up to Russia, despite my last point above. News reports that they were going to veto sanctions against Russia seem to be perhaps overstated, according to new Finance Minister Yanis Varoufakis: 'A question of respect (or lack thereof)… – the Greek veto over Russia that never was 'Posted on January 29, 2015 by yanisv reply 'On the first day in our ministries, the power of the media to distort hit me again. The world’s press was full of reports on how the SYRIZA government’s first foreign policy ‘move’ was to veto fresh sanctions on Russia. Now, I am not qualified to speak on foreign affairs but, nonetheless, I must share this with you at a personal level. Our Foreign Minister, Nikos Kotzias, briefed us that on his first day at the job he heard in the news bulletins that the EU had approved new sanctions on Russia unanimously. The problem was that he, and the new Greek government, were never asked! So, clearly, the issue was not whether our new government agrees or not with fresh sanctions on Russia. The issue is whether our view can be taken for granted without even being told of what it is! From my perspective, even though (let me state it again) I am certainly not qualified to speak on foreign affairs, this is all about a question of respect for our national sovereignty. Could journalists the world over try to draw this important distinction between protesting our being neglected from protesting the sanctions themselves? Or is this too complicated?' http://yanisvaroufakis.eu
gsmith
Interesting that Iceland has highest per capita use of antidepressants (double European average, according to OECD statistics), which no doubt helps keep suicide rates low, while usage in Greece is very low. At the same time, Greece leads the way in antibiotic consumption. The significance of this last fact escapes me.

Thoughts?