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The leftist party Syriza won last month’s election in Greece by making a passionate case against austerity and in favor of a generous debt relief package. Its victory triggered a global media frenzy as commentators wrung their hands over whether the eurozone (particularly Germany) would bow to the Greek government’s demands and, if not, whether Greece would shed the euro and perhaps cause what would amount to a “Lehman moment” with global financial repercussions.
What happened next was quite remarkable. Initially, the Greek government adopted a defiant and unilateral stance, proclaiming null and void the bailout agreement that Greece has been toiling under. The government sent its flamboyant new finance minister, Yanis Varoufakis, allegedly armed with a new plan inspired by game theory, on a whirlwind European tour in search of allies.
In the end, however, Greece had very little to show for its efforts. After quickly abandoning its demand for a debt haircut, it settled for a four-month extension of the bailout agreement, something it had ardently proclaimed it would never do. The terms of the deal included mostly cosmetic changes: vague language about sweeping pro-market reforms and elusive hints of fiscal flexibility, along with stringent controls on loan disbursements. Greece desperately needs this cash to meet a pressing liquidity crunch made worse by a steep rise in economic uncertainty.
There are several reasons for Syriza’s reversal. First, several pundits misunderstood the complicated nature of the European Union. Rather than expressing a binary contest (Germany vs. Greece or creditor vs. debtor countries), eurozone politics entail a complex interaction of semi-independent supranational entities (the European Commission and the European Central Bank, plus the IMF in the case of Greece) and 19 distinct governments obsessed by their own domestic politics. Greece failed to find any allies among other debtor nations which, having absorbed their bitter austerity medicine and regained access to financial markets, are ready to move on. On the other end, the European Commission pushed hard for a deal, setting aside the concerns of both the ECB and the IMF, which found the Greek plan to be exceedingly vague.
Second, the Greek electorate clamors simultaneously for less austerity and for continuing eurozone membership. In the minds of most Greeks, the European currency is associated with prosperity; indeed, even after seven years of recession, Greece is still better off today than it was when it adopted the euro. Furthermore, euro membership stands for Greece’s integration in Western Europe, which as been the core, almost existential, priority of the Greek nation since its founding in the early nineteenth century. In short, the Greek electorate never handed out a mandate for a return to the drachma.
Third, Greeks contradicted themselves. Although a large majority stands behind the new government’s attempt to negotiate a better deal, the same people, worried about a potentially disastrous face-off, gutted the Greek banking system, lifting over 12 billion euros worth of deposit money in January alone. They thus undermined the foundations of the country’s economy (and, hence, its negotiating clout). In fact, it was the prospect of a catastrophic bank collapse that forced the Greek government’s hand and led it to settle.
Given all these constraints and the challenging economic reality, it will be hard for the Greek government to preserve its own cohesion, keep the voters’ loyalty, and enact tough economic measures that are odds with its original promises. Greece and its European partners are now expected to reach (by June, at the latest) a new, long-term deal for the country’s financing. Given the dire state of the Greek finances and its continuing exclusion from bond markets, this agreement could take the form of a third bailout reaching 30 billion euros. Like all such agreements, it is likely to include strict conditionality on both fiscal targets and structural reforms. The Greek government will find it very hard to sell this deal to its constituency, but it will also lack viable alternatives and will be hampered by its limited experience, ideological outlook, empty state coffers, “austerity fatigue” in Greece, and “Greece fatigue” in Europe. It remains to be seen whether the European Union’s push to keep the euro whole and the Greek people’s desire to stay with it will prove enough to avert the worst.