EUROSCOPE. All eyes on Greece, once again

Two and a bit years after elections brought it a semblance of stability, Greece is back in the headlines as it prepares for a snap general election on January 25. This was after the country’s parliament failed to endorse the government’s candidate, Stavros Dimas, for president.

The latest polls suggest that Syriza — the socialist party that triumphed in the European parliamentary elections last summer — will come out ahead, although narrowly. A poll over the weekend put it at just over 3 points ahead of Prime Minister Antonis Samaras’ New Democracy party.

Syriza’s leader, the charismatic 40-year-old Alexis Tsipras, has sent out a strong anti-austerity message which has struck a chord with Greece’s hard-pressed citizens, as he pledged to re-negotiate a better deal with the IMF and the European Commission, the providers of some €240 billion of aid, which have required sharp cuts in public spending.

He’s promised among other things, to raise the minimum wage, re-hire many of the public sector workers who lost their jobs as the country shrunk its public services, and persuade Europe to write some of its humungous debt burden (the debt to GDP ratio now stands at around 175 per cent against 120 per cent three years ago).

While the euro has taken a beating in recent days, it’s fair to say that the impact of the uncertainty in Greece has had a far less dramatic impact on markets than during the 2010-12 crisis. It reflects the widely held view — in the financial community in the rest of Europe at least — that the crisis is far more manageable than in the past.

“The Eurozone is a very different place this time — a Greek euro exit would still be very inconvenient but would by no means have the impact it would have had in 2012 because of the rescue shield put in place to avoid contagion,” explains Christian Schulz, a senior economist at Berenberg Bank, pointing to the €500 billion European Stability Mechanism — with enough funds to protect Europe’s smaller countries (and even Spain, he argues).

In addition the Outright Monetary Transactions bond-buying programme announced by the European Central Bank (ECB) three years ago, which guarantees the purchase of Eurozone bonds in tough conditions (or as the president of the ECB said at the time, doing “whatever it takes” to save the currency) will also provide a crucial buffer that would limit contagion.

Also offering reassurance are recent hints from the ECB that it could launch a bond-buying programme as early as January 22 for sovereign Eurozone bonds in the face of deflation.

Add to that the fact that banks across the region have recapitalised (further steps were taken following a stress test of 123 banks where a number of vulnerable banks were identified, particularly in Greece and Italy) and the fact that once troubled countries such as Portugal and Ireland are in a much improved economic situation. “Europe could deal with a Greek default and exit,” argues Schulz.

It’s a view purportedly shared by the German government, which was this week forced into reaffirming its commitment to keeping Greece in the Eurozone. This was after German magazine Der Spiegel quoted an unnamed “leading Finance Ministry official” as saying that officials had begun “calmly” examining ways in which Greece could remain in the EU but leave the currency zone. “Resourceful lawyers will find a way,” the magazine quoted another official as saying.

It’s a message that must be taken seriously. The German government has traditionally been careful to steer clear of throwaway remarks. And this one, so close to the election, is being seen as a signal to Greek voters and Tsipras himself. Greece’s bargaining position with the rest of Europe is far weaker than it was three years ago, when the threat of a ‘Grexit’ spurred speculation about all sorts of disastrous ‘contagion” scenarios.

There are also questions over whether Germany would actually let Greece go, as the official suggested. Carsten Nickel of Teneo Intelligence suggests it’s a “tactical manoeuvre” rather than “definitive positioning.”

“As long as the impression of blackmail is avoided, and Tsipras proves to be flexible on his end… there remains room for an eventual deal” that could involve further commitments to reform in return for debt relief,” he wrote recently.

However, others believe there is limited room for manoeuvre politically in Europe, with euro-scepticsm on the rise (as evidenced by the summer’s European parliamentary elections), including in Germany. In such a scenario, convincing domestic parliaments to give the green light to ease Greece’s debt burden and its associated conditions would be a struggle.

It leaves Tsipras in a tough position — should he stick to his anti-austerity demands he could risk having his bluff called, on the other hand if he backs down, it could cost him lots of domestic goodwill at a key time.

At the same time public sentiment in Greece is overwhelmingly in favour of remaining in the EU — a recent poll put the figure at just under three quarters. Either way, time will be crucial — as the IMF/EU aid package runs out at the end of February, and Greece has some sizeable debt repayments to make in the months that follow (just under €7 billion in July and August).

But there are other considerations. While the Greek election’s economic implications might not be as seismic as they once were, the political implications could be profound.

A number of general elections are set to take place this year, including in Britain (May), Denmark (September), Portugal (October) and Spain (December) and the results from Greece could well play a role in the direction they take — either spurring other anti-austerity movements (which could be the case in Spain) or pushing others further into Euro-sceptic territory (Britain).

January 25 is unlikely to deliver immediate certainty on Greece’s future: the polls suggest that neither leading political party is slated to secure an outright parliamentary majority, meaning coalition partners will be crucial — such as a left-of-centre party created just earlier this month by former Prime Minister George Papandreou. However, fortunately for Europe and the rest of the world, its rollercoaster impact will be greatly diminished.

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