It cannot have escaped the attention of many people that the parliamentary election in Greece last month has been causing something of a commotion across much of mainland Europe. Since polls closed on January 25th, and the far left party Syriza emerged with 149 of the 300 parliamentary seats – just two away from an absolute majority – economists from across the globe have been looking to Europe in an attempt to explain just how this outcome may affect the future of the Eurozone.
First, let us look at the origins of the European currency union itself, and the underlying causes of the disputes that we see today.
Syriza and the Single Currency: Background to a Debt Dispute
When the European Union (EU) was established by the Maastricht treaty in 1992, a currency union was at the heart of the agreement. The idea of a single currency was to promote trade and industry across borders, and expand the free market. In practise, however, the single currency lent itself to export economies such as Germany, who were able to sell their goods abroad whilst retaining an artificially low currency. In essences, the smaller economies acted as ballast that would allow larger nations to sell their goods at a competitive price. Conversely, smaller economies began to struggle with prices rising faster than their nations had historically been familiar with, leading to poverty, stagnation, and large scale migration of workers.
When the effects of the credit crunch began to hit all of the world’s economies in 2008, austerity measures were seen as the safest initial response to secure markets and re-introduce stability. However, for the smaller nations who had been struggling just to retain their existing standards of living during the good times, the austerity economics of the past seven years have hit even harder. It is to a backdrop of widespread unemployment, benefit cuts, and lost pension entitlements that the anti-austerity Syriza party emerged in 2012.
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Cause and Effect: The Greek Election Outcome
So who are Syriza? And how have they managed to capitalise on the market turmoil within the Eurozone, and the fall of the value of the Euro?
What is now the largest party in Greek politics began in 2004 as a coalition of 13 disparate, far left organisations. The radical, anti-establishment identity that Syriza held in its formative years enabled it to capitalise on the broad anti-austerity sentiments that were felt throughout much of Europe following the global financial crisis. In 2012, Syriza established itself as a single, unified political party, with a more moderate set of principles that focused primarily on civil rights. Amongst its key platforms were an end to strict anti-terror laws, and a reversal of the harsh cuts imposed on pensions and welfare.
With its populist manifesto, commentators have been predicting a Syriza victory as far back as May 2012. Yet the result has nevertheless been met by the rest of Europe with something almost like surprise.
The European Union’s failure to address the emergence of the new political power in Greece should itself be interpreted as part of a strategy for containing the repercussions of The Syriza Effect. Staying the course and offering no concessions has been the mantra of the political establishment thus far.
It is not hard to see why: the Euro has already plummeted in value against world currencies, and investors’ confidence in both the Eurozone economies, and the currency union itself, has never been lower. Appearing to appease the anti-austerity movement in Greece would only provoke fears of greater instability. Yet the victory of Syriza in Greece makes confrontation inevitable. A failure by the European establishment to act now will foment the very doubt that it has been so careful to minimise until now.
Long Term Solutions: Compromise, Negotiations, and a Chance for Resolution
So the dispute has its two sides: the European Establishment on the one side, including the European Central Bank (ECB), Germany’s Angela Merkel, and Britain’s chancellor George Osborne; and on the other, the popular anti-austerity movement of Greece, which enjoys grass-roots support in Spain and Ireland.
The first glimmer of hope for a compromise is the relaxation of the anti-Euro rhetoric coming from the Syriza camp. The party’s MEP, Dimitrios Papadimoulis, has asserted that Greece’s future lies in the currency union, and that the nation has no desire to become the basket case economy of the Eurozone.
There is a case for compromise. Alongside the single currency outlined in the Maastricht treaty, a number of other core values were set into European law at the same time. These detailed the required levels of national debt and the repayment requirements that were necessary for the union to operate with sound finances, and for nations to be eligible for membership. But since the 2008 credit crunch, very few EU nations have adhered to these targets – even amongst the powerhouse economies. As such, much of Europe has been failing to live by its own rules for the past seven years, and its position for negotiation is weakened because of it.
This is a fact compounded by the ECB’s own decision last month to begin a programme of quantitative easing within the Eurozone. Whilst the newly printed money will provide liquidity to the markets, it at once adds debt to the balance sheets of individual nations, and simultaneously dilutes the value of the Euro in your pocket. The €1.1 trillion total valuation of the scheme dwarfs the €315 billion of debt at the centre of the Greek stand-off.
On Feb 20th the European Institutions gave a lifeline to the Greek government in the form of a four month extension of the Feb 28th deadline. The extension came on the condition that Greece will implement a comprehensive reform plan which will be presented in its entirety in April.
On Monday Greece illustrated the main actions it will undertake to meet the new June deadline for the €7 billion installment, including the pursuit of tax evasion and a spending review.
There is then both a legitimate case, and a prevailing mood, for compromise as opposed for confrontation. Some would argue, there is also now a certain level of necessity, too. Tsipras had to come to terms with the situation and hasn’t ventured too far from what Samaras (his predecessor) had agreed to put in place. At the same time Greece has regained control of its fate and will be able to make or break its immediate stance on the international board within the next four months.
This article is brought to you by Hantec Markets