Francesco Saraceno, OFCE
As I write the Greek people are voting. I was puzzled in the past weeks by the fear (more in the media than in markets, actually) of a “radical” left win. Puzzled, because the radical and ideological policy makers do not seem to live in Greece, today. On January 20 I wrote a piece for the Greek website Macropolis, where I claimed that we should not expect an Armageddon if Syriza wins, but rather some welcome fresh air. I reproduce the piece here:
It is most likely that from the elections of January 25 will emerge a Syriza-led government, the main uncertainty being how large a coalition Alexis Tsipras will have to gather to obtain a comfortable parliamentary majority. This is seen with a fair deal of preoccupation in Europe. A preoccupation that does not seem warranted. Syriza is no longer the radical party of the beginning, which called for the exit from the euro and for a default on Greek public debt. Today it is party whose program can hardly be defined revolutionary, and whose label of “radical” left is justified mostly by the drifting of other social democratic party in Europe (for example in Italy and in France) towards the center of the political spectrum, and towards a de facto acceptance of the European macroeconomic orthodoxy. Syriza’s leader, Tsipras, as the prospects of victory become more concrete, has further softened his tones and is already actively negotiating with the Commission and with the major countries, in view of a compromise on the key points of his program. However, some of the media and some political leaders around Europe continue to present the Greek elections as an incoming Armageddon, and the possibility of a Syriza victory as the beginning of the end for the monetary union.
Let’s see what are the reasons for concern. Regarding Europe, Syriza’s agenda has two key elements. First, in case of victory Tsipras would ask to renegotiate a substantial chunk of Greece’s unbearable public debt, that today is mostly (for around 80%) in the hands of official creditors. Of course, this would mean a loss for creditors to absorb. But, as the Financial Times noted as well, it is difficult to imagine a durable exit from the crisis that has choked Europe since 2008, if at least a part of the debt burden that is stifling the recovery is not removed. The French finance minister has agreed yesterday that some compromise on Greek debt will be have to be found, even if some northern countries are at least as of now inflexible. What seems increasingly evident, in fact is that with the European economy back into deflation the costs, for creditor countries as well as for debtors, of a long stagnation, seem far more important than the loss associated with the debt restructuring. The second key point of Syriza’s electoral agenda is the abandonment of austerity that, albeit less stringent than in previous years, continues to characterize European economic policy In other words, Syriza asks to address the problem of unsustainable debt, so far hidden under the rug, and to finally acknowledge the need for a comprehensive plan to restart the European economy, that goes well beyond the accounting tricks of the Juncker plan. Syriza may seem radical to some German economist. But it is in good company of other well-known extremists such as Paul De Grauwe, the IMF, the US government, and much of the Anglo-Saxon press. The European economy is unbalanced and stuck in a deflationary liquidity trap, Mario Draghi’s faces fierce political opposition, and his arrows are increasingly ineffective; it is therefore increasingly clear that only fiscal policy will be able to get us out of trouble.
On closer inspection, it seems far more radical the position of those who, despite having grossly underestimated the negative effects of austerity, ask for more of the same; of those who insist on advocating supply-side reforms to cope with a chronic lack of demand; and of those who boast having achieved a balanced budget one year ahead of forecasts, when Europe would benefit from a recovery of domestic demand in Germany.
What will happen then, if “radical” Syriza will win the election? Actually not much. Tsipras, comforted by opinion polls among his fellow citizens, does not consider the Grexit option. He will sit at the negotiating table to try to obtain for his country a substantial restructuring of debt, and for Europe change towards a more Keynesian policy. If on the latter objective it is hard to imagine that substantial progress will be made, debt restructuring in some form will probably happen. First, because as we said above, it seems to be an unavoidable event, just waiting for the political conditions to be reunited. And second, because Greece will negotiate from a position of strength. Its primary budget surplus (a proof, if needed, that contrary to widespread beliefs Greece actually did its homework; and painfully so), and the low share of debt held by private investors, around 15%, would allow it not to be subject to market pressures in case of exit and default.
And contrary to some declarations that resemble to pre-electoral tactics (the Greek election game is played in the European arena as well), Greece’s exit from the euro would not arrange its European partners either. First, because it would be accompanied by default, and losses for creditors would be significantly larger than in the case of restructuring. Then, probably more important, because Grexit would have unpredictable contagion effects on other peripheral economies, which not hazardously today look with concern to the increasingly harsh tones used in particular by the German Government. In case of a Syriza victory Angela Merkel will most probably soften the tone and agree to negotiate. It is hard to imagine that orthodoxy will go as far as to push Greece out of the euro.
It goes without saying that the negotiation will be harsh, and that tensions will emerge. But today the ECB is more active in assisting countries in difficulty, and its program OMT, which recently received preliminary clearance by the European Court of Justice, is a good protection against speculative attacks.
To conclude, Europeans should stop worrying and let democracy play its role. A Syriza-led government (possibly forming an alliance with George Papandreou’s To Kinima) would not cause an earthquake. Rather the contrary, it could help stirring things up, and bring within the European debate discussion about measures the need for which is now obvious to all except to those who will not see.
This post was originally published in the blog Sparse Thoughts of a Gloomy European Economist by Francesco Saraceno on January 25, 2015