Greece In Limbo

All eyes are focused on looming elections in Greece, scheduled this Sunday, June 17, where the young, charismatic and populist leader of the Coalition of Radical Left—known as SYRIZA party—

Alexis Tsipras 37, attempts to achieve the unimaginable: to challenge and defeat the dominance of the old political elite represented by the centre-right New Democracy Party, led by Antonis Samaras, and the Socialist party (PASOK), led by former Minister of Finance Evangelos Venizelos, two parties that ruled Greece non-stop since 1974 and are mainly responsible for the current status of affairs: corruption, inefficient public administration, nepotism and clientelism.  A potential Tsipras victory will be a major upset to anyone unfamiliar with Greek politics. However, to those who have been paying attention to what is happening in Greece in the last two years, the news of SYRIZA’s electoral success might not come as big surprise. In this article we make the claim that the fiscal adjustment and consolidation program that is being implemented in Greece has failed, mainly for two reasons: the two establishment parties were unwilling to implement drastic reforms and the targets set by the Europeans were overly maximalist. Hence, irrespective of the outcome of the forthcoming elections, tougher days lie ahead for the ravaged Greek economy and desperate electorate. No matter which party emerges victorious a new program has to be implemented. Even under this assumption, nonetheless, a Grexit might still be difficult to avert. Hence, even the formation of a coalition government led by Samaras’ party might not be enough to save the day. This leaves room open for alternative scenarios.

In a country ravaged by unemployment (official numbers put it at 22.7% in Q.1 of 2012) that on the top of it has chronic problems, such as corruption, nepotism, inefficient public administration and tax collection system, and an ailing economy that scarcely produces something of export value, all of them attributes of the clientelistic structure of the economy and the party-system, it should come as no surprise that the rescue plan failed to deliver what it promised: fiscal adjustment, stabilisation, and most importantly, growth. The reason is that instead of much needed reforms (increasing the efficiency of tax collection, curbing tax evasion and reform social services[1], to name a few) another road was chosen: obstinate persistence in horizontal spending cuts,  and across the board tax-hikes in order to mimic and internal devaluation. At this stage, however, it seems no longer viable to keep on slashing wages and imposing further taxes on the population in order to achieve “internal devaluation” to gain competitiveness, promote recovery and at the same time trying to put government budget in order.

The European Union and the policies under the Troika have been rigid, focusing entirely on austerity rather than introducing some elements of growth to counter-balance the reduction in GDP.  This to a great extend was not an explicit choice made by the IMF and the Troika. Rather, it was a reactionary response to Greek political elite’s lack of desire to deal with their clientelistic past and upset their electoral base. Rather than closing down some of the dozen useless public organizations, or bringing equal pay reforms among public sector employees with equal qualifications[2], they chose to postpone reforms dragging their feet to the ground. Instead, the Greek elites opted for massive across the board spending cuts and tax hikes that reduced further consumption and plunged the Greek economy deeper into recession[3]. Hence, it comes as little surprise that Greece remains hugely divided, with the majority of the population not seeing any prospects of recovery and are now looking for a new hope and new leadership to tackle deep structural problems in the Greek economy. And despite the fact that recent polls suggest that the majority of the Greek population wants to stay in Euro, it is neither clear how far Greece can manage to implement further austerity without making the necessary reforms that will re-start its economy, nor is it clear how those reforms will gather social consensus, which is desperately needed for their success, under such extreme austerity that generates social disapproval.

The New Democracy leader, and PM hopeful, Antonis Samaras promotes that staying in Eurozone is the only option for Greece as otherwise will be utter catastrophe whereas, SYRIZA leader Alexis Tsipras suggests that if Greece goes down, it will drag the rest of Europe with it[4]; therefore the terms of the bailout and the program needs to be renegotiated to allow room for growth and less austerity. He also adds that his party wants to stay in Euro and does not think of an exit scenario as the likely one[5].

However, beyond the rhetoric, what can really be done to save Greece at this stage? Most academics in the economics profession have been crying out loud that rigid austerity promoted by German Chancellor Angela Merkel has been choking Europe and the policies have to be reconsidered before it is too late. Moreover, there are two schools of economic thought pertaining to this issue. One camp sees the Eurozone problem as a “debt” problem, i.e. too much debt, too much deficit which needs to be put down into a sustainable trend. The supporters of this camp agree that pro-growth policies need to be incorporated somehow, but the focus should be on putting debt dynamics into a sustainable trend and giving markets the confidence that the governments are committed to good policies. The rest will follow smoothly, they suggest. The other cam that Paul Krugman is the de facto leader, refers to this logic as something being close to “confidence fairy”, something which does not exist. Because further austerity to give markets the required confidence chokes of the economy and the GDP and the further unsustainable the debt becomes. Therefore, they suggest that Europe needs Keynesian type policies, government stepping in and simply doing more spending to avoid a downward spiral. In addition, there are several proposals that envisage common banking deposit insurance scheme to avoid a potential run on Europe’s banks, or issuing Eurobonds with liquidity provision by the European Central Bank.[6]  However, where does Greece stand out in all of these discussions and how does it impact the upcoming election?

Given Greece’s massive debt, another bail-out is almost unavoidable if it stays in Eurozone, simply because its GDP is contracting too fast to keep the debt that it has to take one or roll-over. Yet, no matter how hard Greece tries for austerity, the program is simply too rigid to allow for a recovery. The only path the program envisages for Greece’s recovery is restoring competitiveness through “internal devaluation”, i.e. cutting domestic wages and prices so that the country will sell more abroad. But this argument remains hugely flawed, since it is no longer politically feasible to slash wages (especially if SYRIZA wins), and as long as the wages in northern Eurozone countries (like Germany) do not increase, Greece cannot really improve its  competitiveness under the same currency with rest of Europe. Structural reforms can indeed help Greece improve its competitiveness, but that can only start yielding benefits over the medium-long term, but there are no remedies for Greek economy during the short term. Sadly enough, if the crisis was contained and managed prudently when it first occurred in 2008, and if the reforms were initiated then and not in haste Greece would be in a much better position today. Nevertheless, pragmatism entails to focus on what lies ahead for the ravaged Greek economy, not just analyze what could have been done back in 2008.

Given the popularity of Euro by Greek voters (almost 8 out of 10), whoever wins the elections will first try his or her best to stay in the Eurozone.  A coalition government formed by the New Democracy will be more lenient for austerity imposed by the Troika, whereas a SYRIZA government will not be so lenient. Such a government will try to exhaust all options under the umbrella of EU but a common ground between Eurozone leaders and Tsipras seems to be a long-shot, even though many agree that a SYRIZA victory will probably lead, in the first place, in negotiations and not an immediate expulsion from Euro[7]. The problem with the Eurozone in general is that unlike the United States, Europe is not a structured fiscal union. Therefore, the fiscal transfers or “aid/free lunches” between states are very limited and most of the times are not politically feasible in the stronger states. This makes things worse because the weaker countries do not have their own currencies to implement monetary policies to overcome the contractionary fiscal policies. Therefore, the European crisis presents an impossible trinity: politically infeasible fiscal aid to countries in trouble, lack of domestic currency and adequate tools to fight against the crisis, and requirement of internal devaluation for recovery.

In other words, from Germany and other stronger countries’ point of view, it is not politically possible to bailout for free weaker countries such as Greece without seeing important reforms and budgetary tightening being implemented first.[8] And it is clear by now that this is why Germany has been quite inflexible in pushing hard for austerity. From the Greek point of view, it is not politically feasible to implement further austerity and internal devaluation by simply slashing wages and public investments across the board without shrinking the size of the public sector by abolishing dozen of useless directorates and organizations that used to house the partisan clientele[9]. It is also not economically possible to implement counter-acting policies without having control your own currency. Therefore, in Nouriel Roubini’s words: “the marriage between Greece and Eurozone is doomed to fail and the best possible way is to have an arranged divorce”.[10] To make it perfectly clear, the first best economic solution for the future of Eurozone is more unity, and more integrated fiscal union that resembles the policies of the United States. In other words, a more closely knit family that uses all its buffer stocks for the rainy days for all members. Yet, this seems politically infeasible, at least for the time being, given the current balance of political power in Europe. As a result that leaves us with the second best option—an “arranged divorce”.

But how “consensual” will this divorce be? And is it realistic? A great deal might depend on the electoral outcome of June 17. Yet, no matter who is going to be the winner on that evening, the situation for Greece and Greeks will continue to be dire and Tsipras’ optimism sounds more like wishful thinking rather than a pragmatic answers to the grave problems facing Greece. Despite the major up-set and the big blow that it will bring to the Greek parliamentary -system, a likely Tsipras’ victory will not change the situation on the ground. Due to prolonged political instability, public revenues have collapsed in the last couple of months. Therefore, any government that wants to keep Greece into the Eurozone, assuming that Tsipras is sincere in his intentions[11], will need to take even more drastic measures for fiscal readjustment and consolidation. Europeans, realizing the enormous risk of a Greek collapse and the grave consequences of an immediate Greek exit from the Eurozone as a whole “may opt to prevent a full Greek exit and mitigate its impact”[12]. It will most probably accept to service temporarily the Greek debt, through the “escrow account” held in the Bank of Greece, which will avoid a disorderly default[13] and shore up the Greek banking sector by providing liquidity through the ECB[14]. Yet, they will certainly not accept to fill up the whole on Greece’s primary deficit (excluding interest payments) and leave this task up to the new government. As a result of further fiscal derailment during the pre-electoral period, more drastic measures will need to be taken to curb the shoring deficit. Given that, the question is how the upcoming electoral outcome affects the calculus and if there is even a small window of opportunity for Greece. To fully understand how a divorce will work, we need to examine two possible scenarios (bearing always in mind that the risk of a disorderly default and a Greece exit cannot be excluded as a possibility under any of those two, especially as the Greek economy and the political system are reaching their limits. It can be, simply, an accident.

Given the aforementioned review in mind, if the conservative party of New Democracy emerges victorious the outcome might resemble a suicide in slow motion. Samaras would barely manage to muster enough support for a coalition government (assuming that PASOK and Democratic Left agree with him in principle). De facto, this will be an extremely heterogeneous and weak government that has to walk through a minefield: balancing the budget, implementing the measures of the second Memorandum of Understanding (MoU) that were postponed before the elections and restoring social order to name a few. The task seems herculean and the chances of success for such a weak government with little political capital and growing unruly domestic audience facilities a low expectation of a quick recovery. No one can expect Samaras, leading a coalition government, to succeed where previous government, enjoying much broader support, have failed. Especially under the mounting pressure of SYRIZA, which will consolidate its position in opposition; coupled with Samaras’ own record of populism and distaste for structural reform (he was one of the most prominent opponents of the IMF-EU bail-out plan in May 2010 paving the way for SYRIZA’s surge in the forthcoming elections). Under these circumstances, it might be only a matter of months for such a coalition government to collapse under the pressure of syndicates, public unrest and rage. New elections will have to be called, and even if we assume that Greece manages to escape a fatal accident (disorderly default) during the electoral period, the prospect of a single-party government led by SYRIZA and implementing its views (the most likely outcome of a third election) will guarantee Greece’s exit from the Eurozone. In such an event, the divorce will be neither consensual nor arranged. It will be a brutal process that will destroy the connecting tissue of the society and open the main door to political extremism (the rise of both extremes goes hand in hand as history teaches). The prospect of a single-party radical left government with a strong neo-Nazi party (Golden Dawn) becoming an opposition party, in a bankrupt country is a guarantee for political anomaly and a failed state in the heart of Europe.

On the other hand, if Tsipras emerges victorious, there are equally important reasons to worry. The young leader’s optimism and perhaps this is attributed to his age, will soon vanish under the agony, the difficulties and the challenge of managing his own success and the mounting primary deficit, even if he achieves a moratorium on debt interest and principal payments. It will not be an easy task for SYRIZA to handle the electoral results. In such a case, he will be sooner or later forced to choose between his maximalist pre-electoral positions and reality. And make no mistake, reality always prevails. Most likely, as his recent editorial in FT suggests[15], Tsipras will probably be forced to a U-turn. To justify his stance he can employ as an excuse the fact that he needs to secure the support of the other two moderate centre-left parties: Democratic Left (a moderate social-democrat party) and PASOK. Both parties have made it clear that they have only one condition for supporting a SYRIZA-led government: avoid any unilateral action that will jeopardize Greece’s relationships with the Europeans and put Greece’s Euro membership at risk (of course an exit will still be a possibility but this time not as an accident but as planned and arranged move taken in coordination with Greece’s partners in the EU). This precondition will allow Tsipras to renege on his pre-electoral promises; on the one hand, it will also reassure the Europeans that Greece is a credible ally with who can deliver on reform and not a partner that blackmails with contagion and financial melt-down in order to get their money.

Of course, needless to say, this scenario as well presents us with major risks. There are three possible outcomes. In the event that Tsipras attempts to stick to his promises of a Eurozone exit, it will become a certainty. No European government, especially the German one[16], will be willing to give a credit card with no spending limit unless the Greeks first undertaking some major reforms and fiscal consolidation. In such an event, payments from EFSF/ESM will stop and the new government will be unable to finance its spending needs, such as, printing its own currency in order to finance hospitals, nurseries and other public services will become imminent. Of course, the new devalued drachma will be far from being a hard currency. Imports of oil and raw material will be hard in the initial period and credit lines to Greek business will be shut off. Despite potential recovery in the future, due to devaluation (assuming that Greece undertakes major reforms to change its productive base reforms which the MoU dictates as well) the social and economic costs of such a humanitarian catastrophe will be huge. It is exactly the latter that makes this scenario highly unlikely[17]. No government could survive such a cataclysm. Similar events in Argentina led those who promised everything and delivered a disorderly default to flee the country with helicopters, not the original sinners. Tsipras is smart enough not to make such a grave mistake.

The second possible outcome, is for Tsipras to renege on his promises (after all the coalition government with moderate left parties such as PASOK and Democratic Left would give me the necessary excuse) and implement an new program, one that he likes to call a “National Project for Fiscal Adjustment and Growth”[18]. Nevertheless, in essence it will be a re-written version of the Troika MoU, negotiated with the European allies. This option entails two dangers: firstly, it is highly likely that the Tsipras government will collapse. His party might not be willing to sustain the burden of assuming government responsibilities. Second, the new program might very well fail as the previous two did. The real question for Greece is to reshape its productive model and implement reforms curbing corruption and inefficiency not imposing new tax-hikes, as various SYRIZA heavy-weights have suggested. This will probably lead to one of the same story: the prospect of a Greek exit that will be perhaps disorderly.

Yet, there might be a small variation to this scenario and although this is unlikely, it is important for this discussion as it opens a tiny window of opportunity.  Assuming that Tsipras implements some sort of a fiscal consolidation program that does have some “desired” by the Europeans dose of austerity, the most likely outcome is that the EMU will continue servicing the Greek debt (which is mainly held by IMF and EMU governments) in some sort of moratorium, since neither part would like to move on head-on collision, while leaving to the new Greek government the responsibilities of coping with its primary deficit[19]. This will bring Greece face to face with their own responsibilities: they will have to do something for their finance needs. They can opt for two choices: they can print a parallel currency (call it Geuro) for a temporary amount of time, in accordance with ECB, to finance their need. In case this leads to a permanent adoption of the New Drachma, at least the transition will be smooth and the ECB will guarantee the Euro deposits in the banking system until the new currency is in circulation. In such a case, the catastrophic consequences of an accident are avoided. Additionally, Greece can opt for drastic reforms such as: modernizing tax collection, investing on energy, closing down useless public organizations, and adjusting pay in public sector etc.

This scenario provides a small chance to overcome the political problem of Greece. First of all, it will force SYRIZA to rationalize its maximalist positions and adapt a more pragmatic view. Moreover, it will help to sooth the rage that the Greek public feels for the old political system by electing a new government from the Left. At the same time, since no one can provide a magical solution, this very election of such a government will bring the Greeks face to face with their worse fear: bankruptcy and disorderly default. Those couple of months that the Europeans will only service debt payments but not the deficits will be a simulation of what will follow in the near future. This might cause all political parties to come to their senses. SYRIZA will not assume the responsibility of leading the country to unilateral disastrous actions. On the other hand, no party alone can implement reforms that are needed in order to deal with the deficit. This line of events can be the catalyst for a national unity government that will realistically renegotiate with the Europeans the terms of the bail-out. If all else fail, in the event of a Greek exit, this will be an orderly one and as a result, the social cost will be minimized (of course the cost of abandoning Euro is grave but assuming is unavoidable this looks as a second best). Perhaps Europeans could provide some sort of support (financial and technical) to sweeten the pill. Moreover, a solid pro-European liberal opposition to the SYRIZA-led government might be formed, ready to resume government after Tsipras’ failure, giving the hope of a speedy recovery to the markets.

On the other hand, the national unity government might succeed in achieving its aims (though this is the least likely scenario) and implement reforms with the widest possible consensus among society. Moreover, such a government will have much more bargaining power in Brussels and it is much more likely to achieve more favourable terms for the bail-out package that include less austerity and more growth. Since a unity coalition government will avoid any unilateral action, or else it will fall immediately, this scenario is not completely unlikely. Moreover, it is the only one that provides a tiny sunshine of hope. Tsipras will have to face a pro-reform opposition which is more likely to push him towards the correct direction. Confronting SYRIZA with reality is a necessary condition for dissolving the myths of “easy solutions” and guaranteeing political stability in Greece.

As  aforementioned in the introduction, we believe that the most likely outcome is for Greece to fail to continue being a member of the Eurozone, mainly for economic and political reasons. Nevertheless, there is a big difference on how such an exit takes place. Furthermore, if Greece has a small chance to remain in the Euro, then drastic reforms are needed in order to ignite growth and regain its competitiveness. None of the above is easy or risk-free solution or scenario. What is argued is that the scenario where SYRIZA is victorious, yet not almighty, is not as dire as it might appear in the first place. Saving the day is high-risk, high-cost operation. It entails Greeks overcoming their rage and facing their fears. To paraphrase Machiavelli  rage is an undesirable sentiment as it can lead to self-destructive and irrational behaviour. On the other hand, fear can be useful since it generates rational behaviour based on cost-benefit calculations. Maybe electing SYRIZA can be such an event that triggers this reaction: overcoming rage by sending home the old-guard that is mainly responsible for the current mess and at the same time facing the fear of a disorderly default and Greece’s exit from the Eurozone. The odds are against Greece but the only hope rests in a technique that so much resembles water-boarding: the victim has to be convinced of the prospect of death in order to act rationally. Whether it will succeed is another story (and we offer no guarantee on that by any means). But even if it fails it guarantees two things: first, it dissolves once and for all the myth of “easy solutions” that the left was promising. Any solution (inside or outside the Eurozone) will have to entail lots of hard work and effort by the Greeks. Second, it guarantees conditions for an arranged divorce if things go wrong. In any case, the social costs will be huge but this sounds like a second best option. After all, in the current circumstances, this is all we can ask for.

Güneş Aşık, LSE and Kostas Matakos, University of Rochester

Please cite this article as follows:

Aşık, Güneş & Matakos Kostas (June, 2012), “Greece In Limbo”, Vol. I, Issue 4, pp. 34-42, Centre for Policy and Research on Turkey (ResearchTurkey), London: ResearchTurkey (

[1] In an audit performed by the Papademos Administration in 2012 it was found that there were more than 200,000 illegal social welfare beneficiaries, who were receiving state support not deserved, raising the cost to the budget by more 1.2 billion Euros per annum, the primary deficit of 2011. There were also major cases of fraud that were unveiled during this audit.

[2] A public high school teacher with 30 years of experience and a Masters diploma was earning approximately 2,000 Euros net of taxes. At the same time, an employee at a public utilities company (such as the Greek Railways), with the same amount of work experience, was earning around 5,000 Euros net of taxes and excluding special bonuses. Those astonishing inequalities were always brought to table by the Troika representatives but were never really tackled by neither PASOK nor ND.

[3] It must be noted that the Greek economy was officially in recession since Q.4 of 2008, one year before the start of the program.

[9] Since 2010 not a single public sector job was lost, despite claims and promises for the opposite.

[16] In fact, some argue that the German government might want to kick Greece out of the Euro in order to set an example and save the Eurozone by issuing Eurobonds to rescue Spain and Italy (see for instance



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