December 9, 2014
Open Europe blog team
The news out of Greece has been improving slightly in the past few months in a welcome change from the trend of bleak economic and political news out of the struggling Eurozone state. However, the next few months could see the country reverting to trend somewhat.
Eurozone finance ministers agreed yesterday to allow Greece a technical extension of 2 months to its bailout which is due to finish at the end of this year. This is to allow the final quarterly review of the bailout to be completed – a necessary step to ensure the reforms are in place which in turn will allow for release of the final cash payment from the Eurozone.
Following the agreement, the Greek government announced that it will hold the first round of its Presidential election on 17 December, moving it up from February.
Together these announcements have crystallised some long standing economic and political risks for Greece going into the New Year. However, there are some key questions which spawn from these decisions and also some further risks which remain unanswered, I outline them below.
How does the Presidential election work and what is the likely outcome?
- The President (a largely ceremonial role) is elected by the Greek parliament. In the first or second round the candidate must gain 200 out of 300 votes from MPs. If this is not done then he needs 180 in the third round. If no candidate is found after three rounds, snap general elections are called (these would be around the end of January if they did happen).
- Currently the New Democracy and Pasok coalition holds 155 seats, while the opposition Syriza party has refused to back a joint candidate (a compromise often used in the past) since it is leading in the polls and wants snap elections.
- The government today announced former European Commissioner and Greek Foreign Minister Stavros Dimas as its candidate.
- There is a chance that the government can gain the 180 seats – many of the smaller parties and independent candidates would lose seats to Syriza in a new election and therefore want to avoid having one. Currently, Greek officials put the chance of success at around 50:50 (not exactly inspiring but better than some had expected previously).
What questions still need to be answered?
- It remains unclear exactly how the extension of the bailout will play out. It is assumed the two sides will reach an agreement as before, with Greece eventually pushing through tough reforms. This is probable again but not guaranteed – the room for manoeuvre for the government is limited by the threat of elections. There is only so much they can do without harming their vote share further. Furthermore, the coalition partner Pasok is almost wiped out as a political force and therefore is scrambling for some way to boost its presence. This could lead to radical choices with an election looming.
- There has also been little progress on exactly how Greece will fund itself for next year. The Eurozone has said it is supportive of granting Greece an precautionary credit line – but this is complicated by a number of factors, not least that it is not very precautionary since it seems almost guaranteed that Greece will need to tap it.
- Furthermore, the involvement of the IMF remains unclear. Greece harbours significant resentment towards the IMF and wants to move away from their funding, even though they are still due to pay out another €9bn in 2015 and 2016. If they stay, they will need guarantees that Greece will be able to fund itself for 12 months, and if they leave their funding stream will need to be replaced.
Was the government right to move up the vote?
- It is a risky play, but I think it was probably the correct decision (at least from a political perspective). The key reason is that the uncertainty around what comes after the current bailout (which now ends in February) takes some power away from Syriza. The government has proven it can negotiate with the EU/IMF/ECB Troika and has a track record of managing crises. Syriza does not. As we have seen in Greece over the past few years, fear of uncertainty and possible increasing the chance of Grexit once again can be an important factor in peoples’ voting and thinking.
- Furthermore, the ideal position for Syriza is that a follow on programme would have been negotiated before the vote on the President and potential elections. This would have provided certainty and a platform which Syriza could try to negotiate a new bailout programme and a restructuring of Greece’s debt.
- One key question which remains unanswered is, what would happen if elections take place and Syriza win? While Syriza claim to support euro membership they want a fundamental change in the way Greece approaches European issues. Notably they want a debt restructuring and a complete overhaul of the programme for reforms and consolidation in Greece which accompanies the bailout (or presumably which would tie into a restructuring). This seems very unlikely to materialise, but it is not clear if they would push for a Greek exit from the euro if their demands are not met or if they would temper their position.
- All that being said, if this doesn’t pan out, then Greece will face elections early next year, in a climate of serious uncertainty with no clear plan to exit the bailout. Then again, this was always the risk and may always have materialised.
Overall, risks are coalescing in Greece once again. The fundamental questions over how to fund Greece in the medium term (as it economy tries to recover) or how it will continue to deal with incorrect interest rates and a too strong currency have never been answered. The government’s plan to move up the election is a risky one but politically probably the correct option. Ultimately, the next few months will be a bumpy ride for Greece, but the wider Eurozone should not be too affected since it has plenty of buffers in place to deal with such a crisis.