GREXIT - BRACING EUROPE FOR A SECOND ROUND

Don’t blink; Greece again is on the brink. 

Once again, it seems like it’s never the right time to take some days off in Brussels. As Europeans were still unpacking gifts and drinking and eating unreasonable amounts, Greece put a halt to holiday cheers by announcing it was going to hold general elections on the 25th of January- a year and a half ahead of schedule.

As far as explanations go for this sudden and politically charged decision, the reality is that Antonis Samaras played a high hand, and lost.

Under the Greek constitution, elections for President are held every 5 years (against 4 for the Parliament). Nominated by the government in place, the Presidential candidate must go through 3 rounds of voting in the Greek Parliament (Vouli) to secure a minimum of 180 votes in the final round of voting. The term byzantine doesn’t come from nowhere, and Greek politics is played hard- politicians use of the three rounds to leverage their influence and secure outcomes for themselves, their parties and their constituencies. If support of 180 parliamentarians is not secured at the end of the third round, a general election is automatically triggered.

On the 29^th December, it became clear that the current government, a coalition of the Centre-right (New Democracy party) and the Centre- left (PASOK), led by Antonis Samaras, had fallen short by 12 votes.

Whilst observers may have been expecting elections, surprisingly, none of the two big political parties, including the opposition party SYRIZA and its leader Alexis Tsipras, who have been leading in the polls, were completely ready for a political campaign and were vocally expressing their desire for elections later in the year.

The sudden call for elections has caught them all on the hop, and has pulled the veil back on a volatile situation that has been bubbling under the surface for months.

Inefficient reforms in a dissatisfied Greece

This economic and political turbulence is seemingly exactly what is working for Alexis Tsipras, the leader of the radical left party Syriza, now leading the polls on average 3 points ahead of New Democracy as we approach the election date. Mr. Tsipras is surfing on a wave of exasperated voters, pinned down by harsh reforms that failed to bring back growth 5 years in a row. Indeed not only has GDP in Greece fallen back to its year 2000 level, but this time it’s accompanied by an exorbitant amount of debt reaching 174% of its GDP (109% back then). Moreover, the reforms engaged have cut expenditures (reduction of the number of civil servants, salary freezes, etc.) but have not tackled the deeper problems of the Greek society: tax evasion, corruption, absence of modern land registers… and have thus failed to complete the modernization of the country.

Nonetheless, the potential arrival of a radical left party at the head of a severely indebted state has stirred reminiscent fears of a Greek exit – or “Grexit” – in 2012. As expected, renewed fears have had an immediate impact on financial markets. The Athens Stock Exchange has lost over 20% of its value in less than a month (link). In turn, all eyes turned to Berlin and Frankfurt. The Spiegel reported that Germany would not necessarily be opposed to a Grexit, as the Eurozone is now much more resilient than it was in the period from 2010 to 2012. Indications of these fears are soaring spreads on Greek bonds to levels recalling those of 2010. In parallel, these qualms are triggering a drop of the value of the euro which reached its lowest levels against the dollar since November 2005, and is likely to continue to fall (this drop is also supported by expectations of quantitative easing measures from the ECB).

Apples and apples or apples and pears?

In spite of some striking similarities, the situation is not the same as during the 2010 to 2012 period when the future of Greece in the Eurozone was at stake. And Alexis Tsipras understands this. Indeed, in his program it is no longer a question of leaving the euro for the drachma or refusing to pay back the country’s debt, but rather he has adopted a more reasonable discourse asking for a renegotiation of the Greek debt and a halt to the austerity policies which have failed to bring back growth or diminish the debt burden. He aims to appeal to the more moderate Greek voters but also to the sympathy of other European countries currently facing similar debt burden difficulties, namely the 2^nd and 3^rd economies of the Euro Area, France and Italy.

Another major change compared to 2012 has been the watering down of SYRIZA’s initial program. Indeed the Eurozone is better equipped than it used to be. It has established a number of firewalls such as the European Stability Mechanism, the Banking Union and especially a Central Bank which has shown it will act and buy government bonds when necessary. In other words, the risk of contagion to other Eurozone countries is contained and markets respond to it: spreads of Spain and Italy have barely moved.

Surprisingly though, this is not necessarily good news, especially not for Mr. Tsipras. The increased strength of the Euro Area (at least in appearance) provides Germany with a stronger deck of cards in the upcoming gamble for Europe’s future. The major argument which finally convinced Ms. Merkel (almost too late) to participate in the bail out of Greece was that the Euro Area would implode if Germany did not act. However, if this argument is less valid today, voices against “the lazy Mediterraneans” have not faded away. The German Chancellor is facing very strong pressures from her own political base against erasing (even partially) the Greek debt, which in Germany is perceived as German taxpayers having to pay for the Greeks’ “laziness”. Therefore, it is possible that Ms. Merkel will indulge slightly to the right following the CSU, in order to oust the AfD (Alternative für Deutschland).

Moreover, the German government also understood that it was being closely watched. Indeed, firewalls may calm financial markets but it is feared that demonstrations of leniency might encourage other countries to cut austerity policies short. Firewalls erected to stop the deadly “feedback loop” between sovereigns and banks are not high enough to stop other Member States to start questioning current economic policies.

Yes We Can – Podemos or not?

The Greek elections are not only a Greek issue, nor even a German-Greek problem, but the outcome will resonate within other European national political/election debates. On one side, voters in crisis-ridden countries such as Spain and Portugal will be watching if new negotiations between the Troika and Greece are to result in either debt forgiveness or renegotiation of the bailout terms – due to end in February – or both. A favourable outcome for Greece (staying in the Euro Area with a haircut on its public debt) could rattle up support for Spain’s new left-wing party Podemos calling for fairer and more growth orientated politics. On the other side, Fins, Brits, Poles, Danes and Estonians (also facing elections this year) might under such circumstances turn to populist anti-European parties, which will promise them that no more hard earned tax money will be spent on “lazy Southerners”.

Either way the Greek elections on 25 January will rattle the cages of Europe’s capitals and Brussels as Mr. Juncker will be seeing the rules of the game on his investment plan change and the perception towards stimulus-based growth policies evolving. Although 2015 has just begun, with such an outlook ahead, we might already wish it to be 2016.

We’ll be closely following the Greek elections this week, and into next week. Tomorrow, Ilektra Tsakalidou will be writing on Alexis Tsipras options in the event of a win on Sunday. We will also be tweeting throughout the week and from the polls on Sunday: @fleishmanhillardEU.

By Claire Bravard

With the help of: Ilektra Tsakalidou, Alexandria Hicks, Joachim Wilcke, Lucie Martin & Martin Bresson