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Jan 7, 2016 | 10:00 GMT

7 mins read

For Greece, 2016 Brings New Challenges

(CHRISTOPHER FURLONG/Getty Images)
Summary

In the days ahead, the Greek government will begin another round of complex negotiations with its creditors and political parties on a new phase of economic reform. At the center of the talks will be a plan to restructure the country's pension system, a particularly sensitive issue given that pensions form one of the last social safety nets left standing in a country where at least a quarter of the active population is unemployed. Though the risk of a Greek default or exit from the eurozone will be lower in 2016 than it was in 2015, the threat of social unrest and political volatility will loom large.

The Greek government is preparing for what is likely to be a difficult bargaining process both at home and abroad. Unemployment affects roughly 25 percent of Greece's active population and over 50 percent of its youth, meaning entire families depend on the pensions that their elderly members receive to survive. As a result, Greek administrations have historically been reluctant to implement structural reforms within the pension system.

But the government may no longer be able to avoid them. Greece's foreign lenders are pressuring Prime Minister Alexis Tsipras' administration to tackle the pension system head-on. The country spends roughly 17 percent of its gross domestic product on pensions — the highest rate in the European Union — and with a shrinking workforce, low fertility rates, inefficient tax collection, funding shortfalls and legal loopholes, the system is no longer sustainable.

Athens' creditors want the government to slash its spending by about 1.8 billion euros ($1.9 billion) this year. To that end, Greece is expected to present a formal plan by late January that details how it will go about meeting this target. At that time, the lenders will assess the status of Greece's bailout program and decide whether Athens qualifies for the next tranche of financial aid. The Greek government hopes to gain approval for the reforms — and receive its funding — sometime in early February.

However, Athens will encounter several major obstacles in achieving its goals. At home, Tsipras holds a majority in the Greek Parliament by only three seats; even a small rebellion within the ruling coalition could topple the government. Meanwhile, Tsipras must convince creditors abroad that Greece is making enough progress to receive the next injection of cash.

This explains Athens' latest charm offensive. On Jan. 4, the Greek government sent a draft list of reform proposals to the European Union, hoping to open negotiations as quickly as possible. In the coming days, Greek officials plan to visit Brussels, Berlin and Paris to convince lenders that Athens is committed to reform. The Greek Cabinet also shared its proposals with Parliament in an effort to garner support from as many lawmakers as possible. (In the past, opposition lawmakers have accused Tsipras of keeping Parliament in the dark on his government's plans.)

Juggling the demands of domestic and international actors will be an extremely complicated endeavor. The Greek government's proposals include the consolidation of all public pension funds into a single new fund for purposes of efficiency, changes in the way pensions are calculated, and higher social security contributions by companies and workers. Athens is also planning to cut pensions for future retirees, which will likely be the most contentious issue since creditors want Greece to reduce the pensions of current retirees too.

So far, the Greek government's pitch has gotten a cold reception both at home and abroad. Opposition parties have already refused to support the plan, which will force Tsipras to rely on his own lawmakers to push the reforms through Parliament. Meanwhile, members of the ruling Syriza and Independent Greeks parties have stayed mostly silent on the matter, though dissent could grow in the coming weeks. And from the perspective of Greece's creditors, raising social security contributions could discourage job creation and undermine the country's economic recovery.

Social Unrest and Political Fragility Ahead

If 2015 was the year in which Greece's eurozone membership hung in the balance, 2016 will be the year that Greece feels the full social, political and economic weight of its decision to remain in the bloc. In addition to pension reform, Athens will have to start enforcing a controversial tax hike on farmers and move forward with its privatization program in the months ahead. These measures will test the stability of a ruling coalition comprising left-wing and nationalist parties and the tolerance of the Greek people.

And so, conditions in Greece will be ripe for unrest this year. Farmers have already promised to "go to war" against plans to lift agricultural subsidies. Unions will probably take to the streets to protest pension reform. And a recent measure that reduces protection for mortgage debtors against home evictions could make Greek citizens even more worried about their futures, despite the fact that the measure itself is unlikely to lead to mass home repossessions.

Tsipras' biggest challenge will be keeping his government together in the face of this discontent. Luckily for him, the Greek opposition is weak and divided. New Democracy, Greece's main opposition party, is still struggling to find new leadership, and no other party is big enough to challenge Syriza. Thus, the greatest threat to the prime minister's administration will come from within. Should Tsipras lose the support of his coalition, he will have to seek new partners in Parliament or call for new elections. Most Greek voters still want to remain a part of the eurozone, a fact that forced Tsipras to accept a new bailout program in July 2015. But in the event of new elections, popular support for eurozone membership cannot be taken for granted, especially since Greece's economic recovery is almost certain to be slow and uneven.

Complicating matters is Athens' promise to voters that the current reforms will eventually lead to some sort of debt relief, most likely in the form of longer maturities and lower interest rates. But several issues are delaying talks over this relief. For one, Athens does not want the International Monetary Fund to be involved in Greece's reforms after the country's current program with the institution comes to an end in March. The IMF is one of the toughest international organizations when it comes to implementing austerity measures, but it is also one of the strongest proponents of debt relief for Greece. Should the IMF be excluded from future negotiations, Athens' chances at securing debt relief will drop.

Added to the jumble of issues affecting talks is Europe's refugee crisis, which is straining Greece's relationships in Northern Europe as some countries argue that Athens should do more to stem the influx of asylum seekers into the European Union. Under pressure from the bloc, Greece has reluctantly accepted assistance from its Frontex agency in increasing controls along the Greece-Macedonia border. However, some politicians in Germany and other EU member states still believe Greece should be suspended from the Schengen Agreement, which eliminates border controls on the Continent. While debt relief and the refugee crisis are supposed to be separate issues, they will continue to be intertwined within the talks as Athens and its creditors use them as bargaining chips.

At this point, the Tsipras government still has a few factors on its side. Support for the far-right Golden Dawn and anti-austerity parties such as Popular Unity remains relatively low. Greece's 2016 calendar of debt maturities is not as pressing as 2015's, which at least somewhat reduces the likelihood of a Greek default. Capital controls that were introduced in the middle of last year to protect the banking sector are still in place, and Greek banks are in the process of recapitalizing. Still, the Greek economy is forecast to contract yet again this year, which means that social unrest will remain a threat throughout 2016. If prolonged protests and early elections ultimately take place, it could once again raise questions about the enforceability of Greece's bailout program and the country's membership in the eurozone.

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