Greece – between a rock and a hard place?

The recently elected Greek government has won itself some breathing space as a result of last Friday’s agreement with the other members of the Eurozone. Not much of a breathing space, just four months, and in the meantime there are strict conditions attached to the extension of the current finance agreement. However an immediate collapse has been averted and the ball is now firmly in the hands of Syriza. As I have previously written, Syriza has a strong case, at least in economic terms. Alas, the key decisions will be taken by politicians and not by economists. The Greek government has to persuade a majority of the other governments of the Eurozone. The omens are not looking too good.

It is worth emphasising here that it is not helpful to describe this as the rest of the Eurozone ignoring or thwarting the wishes of the democratically elected government of Greece.  All the governments in the Eurozone are democratically elected. You and I might not like who has been elected, but we must respect their rights as much as the rights of the Greeks. And for Syriza to achieve its twin objectives – an end to austerity and to remain in the Euro – it needs the agreement of the other Eurozone governments.

An end to austerity and stay in the Eurozone?

The difficulty for Syriza is the twin nature of these objectives.  Most Greeks almost certainly agree with these two objectives, to end the austerity measures in place in Greece, and to stay in the Euro.  However it will be very hard for Greece to get a majority of Eurozone governments to agree to this, other than some cosmetic changes. The reason is that some countries, such as Germany, Austria, Finland and others, are wedded to the virtues of austerity. Austerity is seen as much as a moral issue and has been good for them. So they see no reason why Greece should be let off the hook, as they would probably put it. Other governments, such as Ireland, Spain and Portugal, which have willingly agreed to their own austerity programme, have no interest in supporting an abandonment of austerity for Greece.  They would have a damming political price to pay if austerity was seen to have not been necessary after all.

Syriza has been elected on the promise to end austerity and stay in the Euro.  What if that proves to be impossible? This is the great unknown at the moment. If an agreement, acceptable to Syriza is unforthcoming, then the people of Greece will have to choose between maintaining austerity or leaving the Euro. While many non Greeks, on both the right and the left, would love Greece to exit the Euro, it is not at all clear that most Greeks agree. So far opinion polls have consistently shown a majority in favour of remaining in the Eurozone. Though some members of Syriza are for a Euro exit, the majority are not and Syriza’s election platform was to stay in the Euro. So if push comes to shove, and the people of Greece have to choose, it is quite possible that they will choose to stay in the Euro and just put up with the austerity. In this respect it is worth reminding ourselves that Syriza only won 36% of the votes in the recent election.

Can austerity be ended anyway?

The other difficulty for Syriza and for all Greeks is that ending austerity may not be achievable anyway. At least not in the short and medium term. If there is no agreement with its partners, and Greece does decide to leave the Euro, or is somehow forced out, the options are none too good. Leaving the Euro would almost certainly mean a default, at least in practice. While this would at a stroke remove the debt overhang, the country would for some time have no access to borrowing. The government does run a budget surplus, so would be able to pay its way in Greece. However the big downside would be the creation of a replacement for the Euro. Whatever this is, New Drachma?, it would be worth very little. While this would help Greek exporters, it would punish all those who rely on imports. And here is the rub for Greece – its imports are probably more important than its exports. Greece has not much of a manufacturing base and just about all of its energy needs are imported. All of which have to be paid for in Euros or dollars. Which would become terribly expensive for most Greeks. Even the much vaunted tourism depends to some extent on imports – energy, transport etc.

This can of course change. As some imported goods become too expensive for most people, local substitutes will be found. Alas this will take some time. In the short and medium term, leaving the Euro and the massive devaluation that this implies, offers little, if any, gain for most Greeks.

The outcomes facing Greece are not good. The best outcome would be for the other Eurozone countries to admit the error of their ways and change tack on austerity, not just for Greece for all of the Eurozone. All the other outcomes just prolong the agony and suffering of lots and lots of Greeks. As someone once said, a week is a long time in politics, so let us hope that four months is long enough for something good to turn up.

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