On January 25 Greece held national elections. The incumbent centre-right party fell to a distant second behind Syriza led by Alexis Tsipras a populist ex-communist. A decade ago Syriza won only 4% of the vote. This time around they walked away with 36% of the popular vote and 149 of 300 seats.
Syriza’s success thrust the entire Eurozone into uncertainty causing the euro to plunge to an 11 year low. Despite rallying since that low, further volatility seems to be on the horizon. It was over 5 years ago that the European Sovereign Debt Crisis began. Now the focal point of that crisis – Greece – is again front and centre as the euro tailspins and the very future of the Eurozone is being questioned.
The European Debt Crisis crippled the Greek economy. Greece was forced to ask for a bailout from the troika – the IMF, European Central Bank and European Commission. The bailout was accepted but harsh austerity measures designed to cut debt (by slashing government spending) were also imposed. Unemployment went through the roof and far-right and far-left parties began to gain popularity in Greece.
Mr. Tsipras ran on a platform of renegotiating the austerity reforms imposed by the troika. Rejecting these reforms would result in a loss or massive reduction in financial aid and the possibility of Greece leaving – or being forced to leave – the Eurozone.
In recent negotiations Yani Varoufakis, Syriza’s finance minister, has stood firm on his party’s anti-austerity positions. Jeroen Dijsselbloem, head of the Eurozone finance ministers’ group, has warned Greece that if the country reneges on it austerity commitments then it will not receive the assistance it needs.
A Greek Standoff
If Greece does not receive the scheduled €7.2 billion assistance from the troika on February 28th the effects on the Eurozone – and the euro – could be disastrous. Despite insistences to the contrary from both sides, some analysts including former Chairman of the US Federal Reserve Alan Greenspan predict that Greece could leave the Eurozone.
Right now it seems that Syriza will not budge from it’s position. Party officials argue that Greece’s debt (which has risen from 109% to 175% of GDP over the past six years despite austerity reforms) is unpayable. Syriza wants to abandon austerity, negotiate debt forgiveness, and renegotiate financial assistance from the troika while simultaneously embarking on a huge government spending program.
What does a ‘Grexit’ mean?
A Greek exit – often shortened to ‘Grexit’ – could be disastrous for the country, the Eurozone and the Euro itself. Greece is already sitting at about 25% unemployment, without support from the EU the country would be unable to pay it’s bills. Worse still, a Grexit could undermine confidence in other debt ridden Eurozone countries like Portugal, Italy and Spain and cause the euro to tailspin. A Grexit could encourage other countries to reject austerity and eventually follow Greece out of the Eurozone.
Euro Held Hostage
It seems likely that the euro will be held hostage as long as the stare down between Syriza and the troika continues. When, or if, a deal is reached the euro could receive a much needed boost but until then the currency will likely remain volatile. Investors in the euro could stand to gain – or lose – a lot
Follow the Current to stay up to date on the latest Euro news, analysis and updates. Check out our Country of the Week to learn more about Greece.
Stay informed. Stay Current.