The pre-election campaigns of the two major political parties have been dominated by themes of a Greek exit from the eurozone – austerity and public debt – but they are missing the most important one, at least from the official lenders’ point of view: structural reforms. Without a commitment on these reforms, any new government will find it very difficult to reach an agreement with the troika on debt relief and an end to austerity. This may lead to a stalemate whose economic and political fallout is difficult to gauge at this point.
According to opinion polls and, most importantly in our view, the betting odds for the 2015 election, the leftist SYRIZA party is the favorite to win. Still, the election outcome should not be taken for granted since SYRIZA’s lead over the conservative New Democracy party has been cut to within the sampling error according to some polls in the last week or so and there are many undecided voters. So far, the campaign has been dominated by economic topics while Premier Antonis Samaras recently introduced the theme of illegal immigration in a bid to appeal to right-wing voters lured by Golden Dawn and the Independent Greeks party.
After five years in an austerity program, accounting for fiscal measures of more than 60 billion euros, or 30 percent of GDP, which is unprecedented by international standards in developed countries, many Greeks are simply fed up with it. As a result, they are willing to vote for a leftist party which promises to end austerity, increase social spending and tax the rich in a country where the vast majority of the population earns an annual income of 35,000 euros or less.
The voters are not the only ones siding with the argument that austerity cannot go on. Well-known economists around the globe, politicians and even the financial markets are of the same opinion. They reckon too much austerity undermines economic growth and has become politically explosive, helping anti-European, nationalist forces, but Germany is definitely not of the same opinion.
SYRIZA has won many points by embracing this theme, which is very popular among voters. At the same time New Democracy is at a disadvantage, although it is promising to end the current program and enter a new relationship with the EU and IMF, entailing lighter surveillance after backing down from its earlier call for a clean exit. It has tried to counter SYRIZA’s argument against austerity by raising the specter of Greece’s exit from the euro, but that does not seem to be as powerful among voters as it was before the June 2012 elections. After all, SYRIZA is now in favor of the country remaining in the eurozone.
SYRIZA also appears to have the upper hand among voters when it comes to dealing with the public debt. It claims the debt is unsustainable and is calling for a haircut to considerably reduce the debt ratio, an argument embraced by the IMF and others abroad. According to the conservatives’ official line, they want the debt to be sustainable, arguing it would be contradictory to say the opposite and call on investors to buy Greek bonds to refinance the country’s borrowing needs. So, they are in favor of debt relief in the form of extending maturities, converting the floating interest rates into fixed and reducing the interest rates charged. However, they had repeatedly argued for smaller primary budget surpluses in the negotiations with the troika, which indirectly implies that the debt is not sustainable.
Although SYRIZA has the upper had when it comes to ending austerity and reducing the nominal value of the public debt, it has to make a strong commitment to something else to make these possible: reforms. This is complicated by the fact it has said it will not implement the remaining reforms in the EU bailout program, which has been extended till end-February, and will roll back others. But everybody agrees it will be extremely difficult for Germany, the IMF and others to accept a SYRIZA-led government’s demands to end fiscal austerity and cut the public debt without a commitment to structural reforms, including some very unpopular ones such as pensions.
Many analysts and others have focused on a Grexit but have underestimated the importance of this commitment on the part of the new government to get some austerity and debt relief in return. Without these structural reforms, most likely, there will be no concessions from the lenders on the fiscal and debt fronts and therefore no accord. If SYRIZA wins the elections, it will have a hard time reaching a deal on austerity and debt because it has within its ranks many trade unionists and others who fiercely object to the reforms.
So, although SYRIZA has an advantage over New Democracy among voters on the themes of austerity and debt, it may not be able to capitalize on them if it does not clinch a deal on reforms. Failure to do so may harden the lenders’ stance and make SYRIZA’s commitment to keep Greece in the euro expensive. Therefore, the major parties’ commitment to reforms may be the key to future economic and political developments. If this turns out to be impossible, a stalemate will ensue, with serious political and economic consequences.