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,
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