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After a snap poll the ruling New Democracy party (led by Prime Minister Antonis Samaras) was defeated by the anti-austerity party of the left, Syriza (led by 40 year old Alexis Tsipras). They took 149 seats just out of reach of the 151 required for an absolute majority.
The main fighting point for the vote was surrounding the bailout. In 2010 Greece was bailed out to the tune of €240bn (£179bn) on condition of tough budget cuts to curb expenditure. The austerity measures have hit Greece hard with a shrinking economy: unemployment at 25.5% and a whopping 50% amongst 25 – 35 year olds.
In his victory speech, Tsipras said: ‘Greece is leaving behind catastrophic austerity, it is leaving behind the fear and the autocracy, it is leaving behind five years of humiliation and pain.’
Tsipras’s main economic hopes rest on his ability to negotiate with the EU, International Monetary Fund (IMF) and European Central Bank (ECB) – having made an election promise to get half of the nation’s debt written off.
However with a national debt of 175% of GDP (national output of goods and services produced) it’s going to be hard to persuade the EU and IMF to write off such a large amount.
Syriza wants a European debt conference to create a sustainable repayment plan for the remaining half. German Chancellor Angela Merkel has stated at the World Economic Forum in Davros, Switzerland, that she wishes Greece to remain a part of the Euro. She has, however, insisted that the Greek debt is repaid.
Merkel said, ‘Everything we have done politically has been about Greece remaining in the euro area.’
She cited two underpinning Eurozone principles: ‘Solidarity, along with the responsibility to shoulder one’s own risk.’
Finish Prime Minister Alexander Stubb took a tougher approach at the same forum saying it would be ‘Very hard for us to forgive any loans or restructure any debt at this time’.
This suggests three choices for Greece: to continue as things are, endure a continued period of instability whilst discussing extensions to its existing borrowings, or a ‘dirty exit’ from the Eurozone (nicknamed the ‘Grexit’).
Syriza and the Greek population are in favour of remaining in the Euro for fears that a return to the Drachma would cause more problems. The EU and IMF have temporarily suspended the remaining financial aid amid the uncertainty of the election.
The cause of the Greek depression can be pinpointed to several factors. First: the fall in GDP growth prior to 2008 with a need to increase competitiveness by reducing bureaucracy and lowering salaries alongside government spending for non-growth areas such as the military being redirected. Second: a huge jump in the budget deficit between 2004 and 2009, where output increased by 40% while government spend increased by 87% and tax revenues only increased by 31%. As a result government departmental budgets were only allowed to increase by half the rate of inflation.
The Greek government also had a weakness when it came to budget compliance, with departments being lax on their control of finances. Greece also had a problem of tax evasion – which cost them on average $20bn a year. In the financial year of 2012 only 50% of taxes were collected, with the other half being deferred under payment plans.
Greek figures were also manipulated, with Goldman Sachs being paid to either hide debt levels through a swapping scheme or, more notably, a ‘cross currency swap’ whereby Greek debt was converted into Japanese Yen at a fictitious rate to hide the true level of debt. This allowed Greece to skew its figures and continue its excessive spending whilst surpassing Eurozone stability measures.
The results of the Greek elections are seen as a victory for anti-austerity, a champion of workers’ rights and those at the bottom who have suffered at the hands of the elite, but the cost is yet to be determined.
The Euro reached an 11-year low on the back of this election result (alongside quantitative easing plans announced by the ECB last week). The uncertainty around the debt plan for Greece will no doubt cause the Euro to struggle.
This won’t just affect Greece but the likes of Germany, which has been seen as the adult managing a child’s pocket money. In turn the drop in value of the Euro will and has hit the stock markets around the world.
As the financial world braces for a bitter standoff between Greece and its creditors, in particular Germany, other Eurozone nations that have been bailed out such as Italy, Portugal, Spain and Cyprus will watch with interest. Though it is highly unlikely we will see the ‘Grexit’, Prime Minister Tsipras has the momentum going forward with a strong anti-austerity mandate.
The longer this plays out the more jumpy the market will get, which in turn will hurt the Eurozone and all member states. However Tsipras faces an uphill battle, with Head of the Eurozone finance group, Jeroen Dijsselbloem, saying at a meeting after the result, ‘There is very little support for a write off in Europe.’
This prompted Tsipras to state that he is ready to negotiate with his peers for a ‘just, mutually beneficial and viable solution’. Only time will tell if change really has come to Greece.