(AP photo)
Andy Langenkamp is a global policy analyst for ECR Research.
Alexis Tsipras wasted no time following his election as Greece's prime minister. His Syriza party quickly formed a coalition with the right-wing anti-bailout Independent Greeks, who with their 13 elected lawmakers gave the governing majority a total of 162 members of parliament. In a victory speech, Tsipras told supporters that the Troika (the European Commission, the European Central Bank and the International Monetary Fund) will be a thing of the past.
To deliver on that promise would be no small feat, but voters clearly want Tsipras to try. Some observers now fear that a Syriza win could eventually spell the end of Greece's participation in the monetary union, though Syriza's tone on eurozone membership has moderated of late. Most experts, however, assume that Syriza's bark will turn out to be worse than its bite. To the surprise of many, in recent years Greek voters have become more enamored of the euro - almost three-quarters want Greece to stay in the eurozone.
Meanwhile in Germany, some voices have called for Greece to quit the euro if it is so keen to cut short reforms instead of cutting spending. This is probably a ploy used by Chancellor Angela Merkel to gain an advantage ahead of the negotiations over a potential new aid package for Greece. The trade-off could be debt repayment extensions - the so-called extent and pretend method - in exchange for real reforms on job markets, pensions, bureaucracy, etcetera.
In other words, events could take a turn for the better. After all, Germany and Greece both stand to benefit more from compromise than from a collapse of the eurozone. (Seventy-to-eighty percent of the Greek national debt, which runs to over €300 billion, is owned by the Troika, in which the Germans have the largest share.)
A game of chicken
The Greeks will now have to haggle with the Troika in order to receive the remainder of the country's aid package. Simultaneously, Greek banks will be hoping for more cash injections by the ECB. If no agreement is reached by Feb. 28 (a deadline that has already been extended by two months), Greece will have no title to the outstanding €7 billion tranche, and the ECB will tighten requirements on Greek collateral. This could plunge the country into a fresh crisis.
So we can expect a game of chicken. The Greeks and Germans will drive straight toward each other, but both parties will probably alter their course, and they will probably do so at the last moment. Yet we cannot rule out full-on collision. If so, inflated egos will have played a part.
Let's look first at what drives the German/Troika side to stay on a collision course: The German economy is doing quite well, with very low unemployment rates. Further, countries such as Spain, Ireland, and Portugal are in a much better state than they were a few years ago. The financial sector is more robust; the eurozone's foundations have been reinforced by a partial banking union, and its member states have all signed a Fiscal Compact. Germany, backed by other eurozone countries, could therefore convince itself that the fallout of a Grexit can be absorbed. Said belief could encourage a rigid approach.
In turn, this could stir up ill will among the Greeks, who may believe that they are better suited to negotiate than they were in 2010 and 2012. Greece has a primary surplus and a small current accounts surplus, and it has achieved a modicum of economic growth. Greek banks have become far less reliant on emergency funds from the ECB and Greece's own central bank. Athens might feel justified in taking a tougher stance in negotiations as a result. National pride could also play a part. While numerous studies show that it makes more economic sense for Greece to stay in the eurozone, rationality is not guaranteed to win out.
Still, I think a Grexit is unlikely. I find it more probable that Greece will reach an understanding with its reform-loving creditors - despite the political risks for a fragile government - and the markets so far agree. Yields on Greek 10-year bonds stand at around 9 percent - in March 2012 they almost hit 50 percent. Furthermore, long-term interest rates in other vulnerable countries such as Portugal and Spain have not risen. Neither are stock markets panicking. In other words, investors are not yet worried that a new crisis in Greece would spread elsewhere. Right now, the ECB's announcement of quantitative easing overshadows whatever worries the markets have about the outcome of the Greek vote.
