Greek elections raise fears of looming eurozone showdown

Greece head to the polls on Sunday in an election likely to propel a left-wing party to power, setting in motion a confrontation over austerity measures imposed on Greece by the eurozone that could threaten the stability of the troubled currency union.

The Syriza bloc, a coalition of leftist parties in Greece that holds, in some polls, a 10 percent lead among voters, has campaigned on a promise to challenge the terms of eurozone bailouts that stabilized the Greek economy after the 2010 debt crisis. Faced with default, the Greek government accepted packages amounting to 240 billion euros, or $269 billion.

Syriza has criticized the terms of the Greek bailouts, administered by a “troika” of the International Monetary Fund, the European Commission and the European Central Bank, for the austerity measures they placed on the Greek economy. These conditions required Greece to run budget surpluses and cut spending, which critics say have compounded the country’s bleak economic picture.

Greece currently has public debt equivalent to 177 percent of its GDP, while its unemployment stands near 25 percent — a figure that shoots up above 50 percent when looking at joblessnes among young adults.

“Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity,” wrote Syriza leader Alex Tspiras in an open letter to Germans published on Jan. 13 in business daily Handelsblatt. “We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.”

Germany, the Eurozone’s most dominant economy, and other eurozone policymakers who blame Greek mismanagement for their own problems, have expressed reluctance to re-negotiate the terms of those loans.

If Syriza wins at the polls on Sunday, some kind of confrontation between the EU and Greece is virtually inevitable. Having campaigned on negotiating the terms of the bailout, Syriza is unlikely to back down from those demands once elected, and some in the Syriza alliance are pushing to leave the eurozone altogether if their demands are not met.

While few analysts believe that a Greek exit, or Grexit, from the eurozone is likely, even the threat of the so-called “Grexit” could have a destabilizing effect on the 19-member eurozone currency union, which has been in recession for most of the past six years.

The primary concern is that a renegotiation by Greece could set a precedent for Spain, Portugal or Italy, countries with an economic trajectory not that much better than Greece that may seek similar exceptions to structural reforms. “Syriza would become the first of the so-called ‘protest parties’ that have sprung up across Europe to win power, sending a clear message of discontent over German policy in the eurozone,” writes the FT’s Kerin Hope.

Anti-austerity parties in Spain, Ireland and Portugal, all with rhetoric similar to Syriza’s have also seen recent gains. Even in Germany, the strongest of the eurozone countries, the Alternative for Germany party has chalked out a markedly Euroskeptic platform that has gained traction.

Fearing that precedent, Finnish Prime Minister Alexander Stubb on Tuesday at the World Economic Forum in Davos said, "It will be very difficult for us to forgive any loans or restructure any debt at this particular moment." 

That argument is unlikely to deter Syriza from pushing for negotiation. “Their logic is that these lending institutions will blink first, because they do not want to take the blame for a Grexit,” said Eleni Panagiotarea, a research fellow at the Greek think tank Eliamep, in an interview with Time.

During the last debt crisis in 2012, eurozone policymakers set aside hundred of billions of euros to stabilize the currency union in the event of a Greek default. Foreign minister Wolfgang Schaeuble of Germany, which would foot the largest part of the bill, says he is no longer considering this possibility. “We don't model any exit,” he said on Friday at a panel during the World Economic Forum in Davos.

Thursday’s announcement of a 1.1 trillion-euro bond-purchasing scheme announced by the European Central Bank to re-inject the flailing eurozone could tempt Syriza to walk back some of its demands. The program would purchase Greek bonds, subject to certain conditions agreed to by Greece.

Also speaking at Davos, Italian Economy Minister Pier Carlo Padoani was optimistic about a compromise. "Once politicians move from being candidates to being members of government,” Padoani said, “they acquire an additional perspective.”