Still No Exit for Greece

Opinion polls in the run-up to Greece’s early general election on January 25 indicate that the left-wing Syriza party is likely to win the largest share of votes. As a result, Syriza stands to earn a crucial premium under Greek electoral law, according to which the party that gains the most votes is allocated an extra 50 of the parliament’s 300 seats. In other words, Syriza could come to power, with enormous implications for Greece and Europe.

Syriza is more a coalition than a unified party, meaning that its leader, Alexis Tsipras, must reconcile moderate socialists, including some of his economic advisers, with radical left-wing members. The implementation and impact of Syriza’s agenda, especially its decisive economic program, will depend on the new government’s ability to maintain support at home and compromise with Greece’s creditors abroad.

Syriza’s economic program rejects the austerity policies supported – or, some might say, imposed – by the so-called “troika” (the International Monetary Fund, the European Central Bank, and the European Commission). These policies require Greece to maintain a very high primary budget surplus – more than 4% of GDP – for many years to come.

Syriza also plans to demand a substantial reduction in Greece’s foreign debt, the nominal value of which remains very high – close to 170% of GDP. In fact, the real present value of the debt is much lower, given that most of it is now held by governments or other public entities and carries long maturities and low interest rates. Nonetheless, repayment “spikes” this year constitute a real short-term challenge.

The problem for Greece is that its creditors may adopt a very tough stance. This largely reflects the belief that, if a breakdown of negotiations triggers another Greek crisis, the systemic risks to the eurozone and the wider European Union would be far smaller than they were just a few years ago. The “acute” phase of the euro crisis is over; even if growth remains elusive, financial contagion is no longer viewed as a risk.

After all, private creditors hold only a minimal share of Greek debt nowadays. In 2010-2012, by contrast, systemically important European banks were exposed, raising the risk of a domino effect that threatened the entire eurozone.

Moreover, a debt reduction in the form of further interest-rate reductions and maturity extensions on foreign government-held debt would not hurt financial markets. But debt held by the European Central Bank and the IMF could pose a problem. If Greece’s new government does not tread lightly in these discussions, withdrawal of these institutions’ liquidity support for Greek banks could follow.

Despite the lack of significant financial contagion risk, a renewed Greek crisis, stemming from a lasting and serious breakdown of negotiations between the new government and EU institutions, would constitute a major problem for European cooperation. The absence of financial contagion would not rule out serious political repercussions.

Europe’s political landscape is changing. Populist parties, both on the far right and the far left, are gaining electoral traction. Some, such as France’s National Front, oppose their country’s eurozone membership; others, such as Podemos in Spain, do not. Nonetheless, the challenge that these new parties pose to Europe could prove to be extremely disruptive.

A Greek exit from the eurozone, together with financial and political turmoil inside Greece, would be perceived as a major defeat for European integration – especially after the laborious efforts made to hold together the monetary union and, with it, the European dream. Such an outcome would be even more disheartening in light of the tragic terrorist attacks in Paris, and after unity marches in France and across the continent rekindled a long-fading sense of European solidarity.

A new image of solidarity is precisely what the Greek election should produce. There is little doubt that the suffering that Greeks have had to endure for the last five years is mainly attributable to the fiscal profligacy and poor public management of a procession of Greek governments. But as most analysts, including at the IMF, now agree, the troika’s approach was also deeply flawed, as it emphasized wage and income cuts, while neglecting the reform of product markets and the dismantling of harmful public and private oligopolies.

For the sake of Greece and Europe, the new government must work with the European institutions to revise their strategy, while taking responsibility for implementing growth-promoting structural reforms. Greece’s creditors and partners, for their part, must provide the fiscal space needed for the reforms to work. Walking away from Greece because it no longer poses a threat of financial contagion is not a politically viable option. Both sides will have to show more foresight.

The last five years have provided two clear lessons for Europe: procrastination only makes reform more difficult, and the end of financial turmoil does not necessarily mean the end of socioeconomic crisis. It is time to use these lessons to develop a cooperative strategy that will finally enable Greece to make real progress toward a more stable future. A Greek exit from the euro is not a more viable solution today than it was three years ago.