Frankfurt’s way or Syriza’s way?

(note, this is the unedited version of my piece in yesterday's Sunday Business Post)

Greece has once again returned to the spotlight as the latest coalition has collapsed trying to elect a President. Snap elections held on the 25th of this month may well see the populist Syriza party in power for the first time, most likely as the dominant part of a coalition. If no stable coalition is formed, another set of elections gets triggered, creating the possibility of an anti-Syriza bloc forming.

Syriza would be the most left wing government in the Eurozone if elected. The eurozone’s leaders are taking the possibility of a Syriza victory seriously. Italy’s La Stampa reports that former ECB Board member and current German cabinet Minister Jörg Assmussen has been in secret talks with senior Syriza leaders for weeks.

The Greek stock market plunged 13% in one day just on the possibility of a Syriza victory, which would usher in a swathe of ‘soak the rich’ policies. This assumes Syriza holds together long enough to enact any of these policies. Syriza is actually a grouping of smaller left wing parties and groups, some of which are vehemently anti-euro, others more moderate on this issue, but united in their opposition to more austerity measures. The acronym SYRIZA means ‘Coalition of the Radial Left’. It is an unstable grouping, and market sentiment reflects this added uncertainty.

The latest Greek turmoil has had absolutely no effect on European sovereign bond markets. In fact Italy, a basket case economy if ever there was one, managed to sell its government debt at less than 2% last week. The markets are not worried one whit about Greece destabilising the Eurozone, thanks of course to the Draghi put from July 2012 as well as the barrel-load of extraordinary measures taken since then to move the ECB into a proper lender of last resort. Quantitative Easing is next up from the ECB, and with near-infinite liquidity for the markets, Greece, and her problems, are hers to deal with.

Economically, Greece is in a heap. And I use the word ‘heap’ in the technical sense. Greece has already defaulted on its privately held sovereign and banking debt either twice or three times, depending on how you count it. Unemployment is running around 25.5%, with youth unemployment at 45.5% at the last measurement. Domestic demand in Greece is nearly 29% below what is was in 2007 as the figure shows, and real wages have fallen 35% over the same period. Ireland dropped around 10% in demand terms from 2007 to 2013, while unemployment went from 5% to 15.2% at its peak here. The chart shows the level of final demand indexed to 2007 for both Ireland and Greece. No prizes for guessing which economy has fared better, though as I’ve argued in this column before, Ireland’s extraordinary level of openness allowed us to weather our period of austerity far better than our Greek comrades have been able to.

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Austerity has been an awful experience for the Greek people. Greece is running a primary budget surplus, where government expenditure is less than its revenues from taxation before debt repayments, of €3.49 billion. This is no mean feat given the extraordinary levels of austerity imposed on the country, and even the current account is showing some signs of improving, while the country’s tax takes are improving year on year. A condition of the Troika’s loan programme is to run large primary surpluses for the next three years. So therein lies the rub for Syriza: how do you increase spending when the official agencies funding your state insist you decrease spending further? Will it be a re run of “Frankfurt’s way or Syriza’s way”?

Syriza’s policies are basically Keynesian, in that they diagnose Greece’s problems as coming from a lack of demand and inappropriate austerity policies applied over the last 6 years. These are both fundamentally correct statements. The issue is where the funding will come from to pay for increases in government expenditure for an economy where the government already makes up nearly 58% of GDP.

In Thessalonika this September, Syriza’s leader Alexis Tsipras committed to restoring domestic demand by increasing public spending, restoring the minimum wage, renationalising privatised companies, increasing unemployment benefits, taxing the rich, increasing supports for SMEs, levying a property tax on large properties, making electricity free. Syriza would pay for this by using the proceeds of a balanced budget rather than a budget surplus, adding in funds gleaned from securing loan haircuts on its ECB debt, issuing a general tax amnesty which would bring in long term tax evaders, increased efforts to tackle tax evasion, and a raiding of two stability funds.

Tsipras’ critics have responded to this shopping list of spending initiatives with a mixture of skepticism and outright derision, pointing out that a lot of the measures, even if they were possible, would take far long to implement, while the estimates of proceeds from soaking the rich are untestable. Some of the policies are good ideas but they require the agreement of the Troika to implement, and amount to an alteration of Greece’s bailout terms. In attempting a re-negotiation, Tsipras has already shot himself in the foot by pledging to remain in the Euro, but the crucial factor of the primary surplus is in his favour. Unlike Ireland in 2010 and 2011, because of the primary surplus, Greece can now simply wave bye bye to debt repayments, or more likely, credibly commit not to repay debt obligations to the ECB. Sabres have been rattled in that direction already. We would see something unprecedented: a sovereign state defaulting on its own central bank in peacetime. But then, everything about Greece after 2008 has been unprecedented.