January 26, 2015

The victory of an anti-austerity leftist party in Greece’s elections may roil the debate in Europe over questions of austerity and fiscal discipline, says Atlantic Council analyst Andrea Montanino.

Alexis Tsipras was sworn in as Greece’s new prime minister on January 26 after his far-left Syriza party swept to victory in elections held over the weekend. Syriza’s victory is seen as a repudiation of the tough austerity measures imposed to deal with Greece’s debt. Syriza has vowed to renegotiate bailouts worth $268 billion.

“What this election in Greece may create is more tension about how to create inclusive growth in Europe, what is the right timing for doing reforms, for making investments, and do this with fiscal discipline,” Montanino, director of the Atlantic Council’s Global Business and Economics Program, said in an interview.

Syriza’s victory has also likely put Greece on a collision course with the International Monetary Fund, and more specifically, with Germany, Greece’s main creditor.

The rest of Europe, especially the eurozone countries, will take a serious look at Syriza’s victory, said Montanino.

“The reason is because what happened in Greece can happen in Spain and there are a lot of anti-Europe movements around,” he said.

Montanino spoke in an interview with the New Atlanticist’s Ashish Kumar Sen. Excerpts below:

Q: Why did Syriza win?

Montanino: Syriza won because after four years of very harsh policies in Greece public debt is higher today than it was four years ago. The Greeks didn’t see any results from austerity or the involvement of the international community. Anybody who was against austerity would have found it easy to win.

Q: The eurozone’s wealthier countries, led by Germany, have pushed austerity measures to deal with the debt crisis. Has Syriza’s victory put Athens on a collision course with Brussels, and more specifically, with Berlin?

Montanino: I think these results will clearly push for big changes in Europe. I also think that the Europeans, especially the eurozone countries, will look seriously at this election in Greece. The reason is because what happened in Greece can happen in Spain and there are a lot of anti-Europe movements around.

Q: Is the election in Greece likely to have repercussions elsewhere in the region – specifically in Spain, France, and Italy?

Montanino: If people start thinking that the Euro is a bad thing, that fiscal discipline is a bad thing, then this is a big problem for Europe, European leadership, but also European citizens.

Each country needs to be very disciplined with the budget. It doesn’t make sense to run high and persistent deficits because at the end of the day markets buy public debt, and markets want to be reassured that their credit will be repaid.

What this election in Greece may create is more tension about how to create inclusive growth in Europe, what is the right timing for doing reforms, for making investments, and do this with fiscal discipline.

Q: What does Syriza’s victory mean for Greek bonds?

Montanino: This is the big question because they announced that they don’t want to respect the pacts. This is probably not something that will scare the financial markets too much right now because most of the Greek public debt is owned by European governments and very little is in the hands of the private sector.

What Greece could do is repudiate the debt, decide not to pay governments, which means that the taxpayers of Europe will lose. But if they do so they will lose access to the markets for many, many years.

If you take the case of Argentina, which defaulted in 2001, they are still out of the market. The risk for Greece is to go out of the market for a very long period. Then the question is how will Syriza finance social programs? To finance these programs you either need a lot of revenues — taxes coming in every year — or you borrow money. If you cannot borrow money and you have a very fragile economy, as you have now, I don’t see space for making investments and raising wages.

I think the Greeks will find a solution with European governments. The possible solution could be to transform this debt in a way that it would not expire and Greeks will pay only interest to the Europeans.

Q: Is that a solution that is on the table and would be acceptable to Greece’s creditors?

Montanino: It depends on the alternatives. If the alternative is that Greece will continue with austerity measures and will plan to pay back the debt — what the Europeans and the IMF want — then this is not the solution on the table.

If the alternative is to repudiate the debt, which, frankly speaking, is not something anyone wants, not even the Greeks, again, this is not a solution, especially for the Greeks that will stay out of the financial markets for many years ahead.

Probably the solution is a reprofiling of the debt held by European Governments (around 60 per cent of the total Greek public debt) transforming it into a sort of “perpetual” debt. ECB (European Central Bank) and IMF debt instead should be repaid to avoid a complete isolation of Greece from the markets, but this requires wide political agreement.

Q: Given that Germany can block funds that could help Greece avoid bankruptcy, is Greece likely to come under pressure to stick with austerity if it wants to remain in the eurozone? Is Greece likely to remain in the eurozone?

Montanino: I think Greece will remain in the eurozone. Sipras didn’t say he wants to leave the eurozone, he just wants to have a different Europe. Leaving the eurozone is difficult from a procedural, legal, and practical point of view.

Europeans have to manage the Greek case. They cannot just say, “We won’t give you money.” In the end, Greece is part of the family. Europe was born to stay together and to help each other.

In the coming months we will see a debate between Greek authorities and European Union leaders on how to give some flexibility to Greece and at the same time keep Greece on track. The next one to two months will be crucial to understanding how the Greek debt will be managed. I am pretty sure something will change.

Ashish Kumar Sen is an editor at the Atlantic Council.

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