The snap Greek election, called for January 25, may end up representing something of a watershed for European politics. For the first time since the beginning of Europe’s long, drawn-out economic crisis, a populist party—the Syriza Party—may take power in an EU country.
It should be no surprise that Greece may be the first. The European financial crisis began there and Greece has suffered through four years of austerity, dramatic negative growth and job losses deeper than anywhere else in Europe. And yet despite those hardships, Greece still suffers from a crushing debt burden of over 175 percent of gross domestic product (GDP).
But the first may not be the last. Across much of Europe, and particularly in the debt-plagued South, there is a growing populist mood on both the left and the right. European governments are increasingly run by broad coalitions of mainstream parties whose principal reason to cooperate is to keep populist parties out of power. In the process, they hew to austere economic policy approaches dictated by Brussels and Berlin, but increasingly unpopular with their voters. Populist parties have taken up the comfortable role of the opposition in bad times, slowly growing their support by criticizing the myriad failures of those who must govern.
Syriza, as populist parties tend to do, offers a radical way out. They intend to renegotiate the provisions of the Greek bailout with the European Union, to write down at least half of Greece’s debt and to relieve the harsh limits on Greek government spending. If the EU resists, they obliquely threaten unilateral default with all of the unpredictable consequences such disruptions would have for the still shaky euro and the European economy generally.
The Contagion from the Election of Syriza
As my colleague Doug Elliott demonstrates in a previous post, these outcomes are unlikely and even if they did occur, Europe is much less vulnerable to contagion than it was at the beginning of the euro crisis. Even a Greek exit from the euro, while hardly desirable, would not likely have major economic effects outside of Greece.
But the contagion from the election of Syriza may be political rather than economic.
What if Syriza takes the reins of government in Greece and things actually improve for Greece? Syriza, if elected, will either succeed in its renegotiation of the bailout or it will not. If the negotiations succeed, the most likely outcome is that Greece will see some relief in its austerity program. If the negotiations fail, Syriza may well default on some part of the debt. It would then rely on its primary budget surplus (estimated by the Organisation for Economic Co-operation and Development at 7.8 percent of GDP in 2015) to sustain government spending even with limited access to international credit. At the same time, it would seek to reassure the Greek business community that default is not a prelude to even more radical measures to avoid capital flight.
In other words, Greece could possibly see an improvement in economic conditions, at least in the short-term, regardless of how the negotiations end. Of course, an exit from the eurozone would be enormously costly for Greece, but this is not Syriza’s program and is not entailed even by unilateral default. Syriza has been at pains in recent months to emphasize that a Syriza-led Greece will remain a business-friendly member of the eurozone and it is difficult to imagine its partners kicking them out—in part because there is no legal procedure to do so. And even in difficult circumstances, the perception that Greeks have taken back control of their economic destiny will sustain Syriza’s leadership for a while.
A perception of Syriza’s success, whether justified or not, would embolden and strengthen similar populist movements in a variety of countries including Italy, Spain and even France. Populist governments in those countries, or simply anti-austerity measures adopted by mainstream parties as a political defense, will quickly anger Germany and other creditor nations, and deepen the North-South divide in Europe, threatening European unity and, soon enough, European economic stability.
In short, Greece could be a harbinger of more populist governance through Europe. And populist governance is always a wild ride.