Greece: Europe's Great Economic Black Hole

Greece's future in the eurozone remains foggy. And no matter what moves its new government will make, the road to economic recovery will not be a painless one.

Greeks will go to the polls on January 25. The outcome may lead to debt repudiation, other severe losses on assets and the beginning of the end of the common currency. Even if Europe avoids the worst, the best anyone can hope for is heightened levels of uncertainty. It is not a pretty picture, and the blame for this mess is so widespread that it would take a book just to name the people and institutions responsible.

The Story So Far

Greece has for some time occupied the epicenter of Europe’s troubles. It was, after all, Athens that in 2009 triggered the continent’s still-raging fiscal-financial crisis by admitting that it had fibbed about its financial health. Since, Greece has received two European Union (EU) bailouts, totaling €240 billion, each conditioned on budget austerity and other economic reforms pressed by the EU, the European Central Bank (ECB) and the International Monetary Fund (IMF)—the so-called Troika. These reforms included measures to privatize government assets and steps to make the economy more dynamic and competitive through labor-market and regulatory reforms. Greece has stuck to its promised budget austerity, though not without considerable angst and political close calls. Though Troika monitors remain disappointed about other reform efforts, they had pretty much concluded that Athens had come far enough to emerge from bailout strictures. The country’s budget had, they noted, balanced and the economy was beginning to grow, albeit haltingly and from a deep recession.

But crisis has found Greece again. This latest phase arises from a quirk in Greece’s political process. The largely ceremonial position of president is vacant. Prime Minister Antonis Samaras of the new Democracy party—which is center-right, pro-austerity and pro-cooperation with the Troika—put forward Stavros Dimas for the post. Normally, this would have been a political non-event. Dimas ran unopposed. But the left-leaning, anti-austerity Syriza party, then leading in the polls, realized that a failure to get sufficient votes would trigger a general election. It worked with other opposition parties, including the far-right and actively anti-Europe Golden Dawn party, to vote down Dimas. Prime Minister Samaras had to call an election. Perhaps because Syriza’s lead in the polls had by then narrowed, he decided on an earlier, rather than a later date. Now this quirk has raised the chance of an anti-austerity coalition coming into power in Athens and with it, possibly an end to Greek cooperation with the Troika, even an end to Greek membership in the common currency.

Uncertainties Inside Uncertainties

It is entirely possible that Samaras will return to office. Syriza’s lead has already shrunk from double-digits not too long ago to only three percentage points according to some polls, well within their statistical margin of error. But even with a Samaras victory, uncertainties would remain. No doubt chastened by his defeat in the presidential poll and by the need to have called an election, he could easily show a greater willingness to soften austerity policies and delay other reforms still longer. Europe, in time, might find him and his new coalition much less cooperative than he or it once were. And this is the most stable and predictable of the potential environments that could emerge from the Greek vote.

A Syriza victory, with its volatile leader, Alexis Tsipras, as prime minister, would open a myriad of possibilities, and there is no way to know what sort of agenda he might put in place. Over the last couple of years, he has talked out of so many sides of his mouth that Greeks going to the polls later this month really cannot know for what or against what they are voting. When Syriza first gained popularity, Tsipras expressed unrestrained hostility to Greece’s membership in the euro and argued that Athens should repudiate much of its debt. More recently, he has softened his resistance to euro membership, though he still espouses a determination to tear up the austerity conditions imposed by the Troika. His current position on debt repudiation remains ambiguous.

Against such a backdrop, the election promises anything from an ambiguous moderation in Greece’s playbook all the way to an exit from the common currency, what journalists in the early days of the current crisis referred to as a “Grexit.” It is little wonder, then, that markets quickly upped the interest rate charged on Greek borrowing from about 5.5 percent a few weeks ago to 9.5 percent right after the election was called.

Possibilities: Some Helpful, Most Destructive

For the Greeks, these more extreme possibilities could cut two ways. On the positive side, an exit from the euro and a return to a depreciated drachma would aid growth by making Greek goods and services cheaper to the rest of the world and accordingly more competitive. Debtors within Greece would benefit, too, having the ability to discharge their obligations in a currency much depreciated against the euro. On the negative side, such a prospect would destroy wealth. Greek savers would see the global purchasing power of their assets drop with a drachma depreciation, whatever initial conversion rate the government determined.