Friday

15th Dec 2017

Opinion

The eurozone's debt moment

  • Between 2008 and 2015 Greek GDP per capita, adjusted to inflation, dived 30 percent to €18,000 (Photo: u07ch)

Greece will hold snap general elections on 25 January bringing to a head a long brewing conflict between Brussels economic austerity policies and Greece's political protests.

Between 2008 and 2015 Greek GDP per capita, adjusted to inflation, tanked 30 percent to €18,000.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

In absolute terms, that is comparable to a collapse of living standards from the level of Israel to those of Libya or Gabon.

In the process, Greece’s ranking in the global competitiveness index has plunged from 67 to 81, below Ukraine and Algeria.

The subsequent social devastation has translated to a new normal in politics.

In half a decade, an entire generation of centrist politicians has been discredited in Greece. When the eurozone crisis took off in spring 2010, Greece was still governed by the Panhellenic Socialist Movement (Pasok) led by George Papandreou, which dominated almost 40 percent of the vote, while the conservative New Democracy (ND) had about a third.

Today Pasok has lost most of its support, while the conservatives are struggling to stay in government.

Meanwhile, the support of former fringe parties has exploded.

The radical left Syriza looks set to win the January election - it has about 28 percent of the vote, as against 25 percent for the conservative ND.

So what will Syriza do if it wins?

From social policies to debt relief

We now know that by 2012 German chancellor Angela Merkel was close to permitting a Greek default - but fear that a Greek contagion could spead to Italy and Spain drew Berlin back from the brink.

So Greece was given its second bailout. Now behind-the-scenes talks have begun over a third bailout amounting to €30 billion.

Syriza, for its part, wants to launch a social-policy package that the Troika – the European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) – considers highly controversial.

The package includes a (big) haircut for creditors; tax cuts for all but the rich; an increase in the minimum wage and pensions to €750 a month; free electricity, food stamps, shelter and healthcare for those who need it; a moratorium on private debt payments to banks above 20 percent of disposable incomes.

But nothing makes the Troika so uneasy as Syriza’s pledge to have an international conference on debt relief.

Tsipras has already addressed the issue in meetings with the EU commission, German finance minister Wolfgang Schauble and IMF officials, while sending his economic advisors to the City of London to reassure investors that debt profiling would only implicate Official Sector Involvement (OSI).

In 2015, after some €250 billion in bailouts, Greece’s financial needs are estimated at almost €20 billion, which features interest payments, IMF funds repayments, ECB’s maturing bonds, and arrears – none of which can be easily delayed.

Led by Samaras’s New Democracy, Greece might cover some of these needs with the hoped-for primary surplus, planned privatisations and creative financial manouvering; but not without a funding gap of €5 billion - €10 billion.

With Syriza in charge, the planned privatisations would be challenged, while the primary surplus would become questionable as Athens would push debt re-profiling.

In both cases, the Greek election outcome will have an impact on the anticipated ECB bond purchases, which also depend on whether Germany will give the go-ahead to the ECB’s full quantitative easing (QE).

In the past few years, Brussels has managed to build insulation mechanisms to reduce (though not to mitigate) the probability of contagion.

But these mechanisms rely on the market expectation that the ECB is about to engage in broader QE, which is expected to include buying the bonds of larger Southern European economies (Spain and Italy), but could exclude smaller peripheral countries (Greece, along with Portugal and Cyprus).

Grexit?

The post-election drama will begin if Syriza wins and starts talks with the Troika.

Tsipras has set the tone by saying that his government would cease to enforce the bail-out demands “from its first day in office”.

He is hoping that the Troika and Germany will blink and support Greece, despite Athens’ new policies.

If they do blink, Syria is expected to allow the dilution of its social policies, but not its pledge of an international debt conference.

It would seek debt relief reminiscent of that granted to Germany in 1952 (62 percent). That would substantially cut the general government debt, which today exceeds 190 percent of the Greek GDP.

But what if neither the Troika nor Syriza back down?

In this case markets would be swept by new volatility and Athens might be forced to exit the eurozone.

Whatever the final scenario, the repercussions will be felt not just in Greece or the eurozone, but worldwide.

Dan Steinbock is an analyst at the US-based India, China and America Institute and a visiting fellow at the Shanghai Institute for International Studies and the EU Center in Singapore

2015: It's the economy, still

After a year of suspended action, the EU needs to show some results in 2015. But changing political landscapes in member states could prove a distraction.

The new Greek crisis: Time for compromise

“Greece wants a lot but has very little money to do that. That’s really a problem," Eurogroup chief Djisselbloem said recently. But Brussels is not in a winning position either.

Iceland: further from EU membership than ever

With fewer pro-EU MPs in the Iceland parliament than ever before, any plans to resume 'candidate' membership of the bloc are likely to remain on ice, as the country prioritises national sovereignty and a more left-wing path.

News in Brief

  1. Juncker: May made 'big efforts' on Brexit
  2. Merkel took 'tough' line on Russia at EU summit
  3. EU leaders added line supporting 'two-state' solution
  4. EU leaders agree to 20 European Universities by 2024
  5. Belgian courts end legal proceedings against Puigdemont
  6. French central bank lifts 2017 growth forecast
  7. EU leaders set to move Brexit talks on to next stage
  8. EU leaders confirm support for two-state solution

Stakeholders' Highlights

  1. Dialogue PlatformThe Gülen Community: Who to Believe - Politicians or Actions?" by Thomas Michel
  2. Plastics Recyclers Europe65% plastics recycling rate attainable by 2025 new study shows
  3. European Heart NetworkCommissioner Andriukaitis' Address to EHN on the Occasion of Its 25th Anniversary
  4. ACCACFOs Risk Losing Relevance If They Do Not Embrace Technology
  5. UNICEFMake the Digital World Safer for Children & Increase Access for the Most Disadvantaged
  6. European Jewish CongressWelcomes Recognition of Jerusalem as the Capital of Israel and Calls on EU States to Follow Suit
  7. Mission of China to the EUChina and EU Boost Innovation Cooperation Under Horizon 2020
  8. European Gaming & Betting AssociationJuncker’s "Political" Commission Leaves Gambling Reforms to the Court
  9. AJC Transatlantic InstituteAJC Applauds U.S. Recognition of Jerusalem as Israel’s Capital City
  10. EU2017EEEU Telecom Ministers Reached an Agreement on the 5G Roadmap
  11. European Friends of ArmeniaEU-Armenia Relations in the CEPA Era: What's Next?
  12. Mission of China to the EU16+1 Cooperation Injects New Vigour Into China-EU Ties

Latest News

  1. Polish PM ready for EU sanctions scrap
  2. Dutchman to lead powerful euro working group
  3. EU mulls post-Brexit balance of euro and non-eurozone states
  4. EU asylum debate reopens old wounds
  5. Estonia completes two out of three priority digital bills
  6. EU countries are not 'tax havens', parliament says
  7. Tech firms' delays mean EU needs rules for online terror
  8. Slovak PM: Human rights are not a travel pass to EU

Stakeholders' Highlights

  1. EPSUEU Blacklist of Tax Havens Is a Sham
  2. EU2017EERole of Culture in Building Cohesive Societies in Europe
  3. ILGA EuropeCongratulations to Austria - Court Overturns Barriers to Equal Marriage
  4. Centre Maurits CoppietersCelebrating Diversity, Citizenship and the European Project With Fundació Josep Irla
  5. European Healthy Lifestyle AllianceUnderstanding the Social Consequences of Obesity
  6. Union for the MediterraneanMediterranean Countries Commit to Strengthening Women's Role in Region
  7. Bio-Based IndustriesRegistration for BBI JU Stakeholder Forum about to close. Last chance to register!
  8. European Heart NetworkThe Time Is Ripe for Simplified Front-Of-Pack Nutrition Labelling
  9. Counter BalanceNew EU External Investment Plan Risks Sidelining Development Objectives
  10. EU2017EEEAS Calls for Eastern Partnership Countries to Enter EU Market Through Estonia
  11. Dialogue PlatformThe Turkey I No Longer Know
  12. World Vision7 Million Children at Risk in the DRC: Donor Meeting to Focus on Saving More Lives