Greece: The Government Prepares for Battle

6 MINS READMar 28, 2015 | 13:01 GMT
Greece: A Beset Government Prepares for Battle
The Greek parliament in Athens looks on during a formal ceremony.

Greece is running out of time and money. To counter this desperate situation, its government is working on a new list of proposals for economic reform to present to the Eurogroup as early as March 30. Between April and June, Greece and its lenders will negotiate a series of compromises. In the meantime, the Eurogroup will provide Greece with just enough money to prevent a default.

However, Greece's main threat will come from home. The government will have to deal with a potential rebellion by lawmakers who oppose some of its proposals. The splits will become more visible in April, when the reforms come to a vote, and they will escalate in late June, when Greece has to seek out a new deal with its lenders. By then, the political pressures on Greece could lead to early elections or even a referendum on Greece's membership in the eurozone.

Greece's promises to its lenders will probably include measures to boost tax revenue, fight tax evasion, maintain the privatization of state-owned companies and balance the budget. With these proposals, Athens hopes to convince its lenders to release at least part of the final 7.2 billion-euro (roughly $7.8 billion) tranche of its bailout program.

However, Greece faces three main problems: a cash crunch, substantial debt maturities and a fragile banking sector. Estimations vary, but many analysts believe that without external help, the Greek government will run out of money at some point in April. Athens has to repay some 458 million euros to the International Monetary Fund on April 9 and some 2.4 billion euros in treasury bills on April 14-17, on top of the costs of running the state.

Greek banks are also facing hardships. Between November and February, deposits in Greek banks fell by about 15 percent, as more than 20 billion euros left the system. Greek savers are sensitive to Athens' negotiations with the European Union and the IMF. The Greek government hopes that a deal will stop the hemorrhage on local banks.

A Battle Abroad

So far, Greece's lenders have been skeptical about the government's proposals. Athens reached an agreement with the Eurogroup on Feb. 20 to extend its bailout program for four months. But many EU officials and governments are unhappy with the lack of clarity and detail of most of Greece's proposals for economic reform. To attain desperately needed funds, Greek Prime Minister Alexis Tsipras promised his foreign counterparts that his government would expand the proposals, aiming to reach a deal in early April.

Germany is the key country to convince, as it is the largest economic and political power in the eurozone. Berlin is particularly skeptical when it comes to Greece. Since the beginning of the Greek crisis in 2009, German Chancellor Angela Merkel has defended the unity of the eurozone while simultaneously promising German voters that taxpayer money would not be squandered on loans to countries that failed to introduce economic reforms.

But Berlin wants to keep Greece in the eurozone. When the Coalition of the Radical Left party, known as Syriza, won the Greek elections on Jan. 25, Germany estimated that the financial cost of Greece leaving the eurozone would not be as high as it would have been in 2011. However, Berlin is deeply worried about the political consequences of such a decision. Germany, an export-driven power, needs to keep the eurozone together. Moreover, it fears that a so-called Grexit could lead other countries in Mediterranean Europe to follow suit.

In addition, Berlin wants to keep Greece integrated with the West. Athens has made special efforts to demonstrate the strength of its ties with Russia, and Tsipras will meet with Russian President Vladimir Putin in April. Berlin fears that Athens could interfere with its policy on Russia by, for example, vetoing sanctions on Moscow. It also fears, along with the United States, that Greece could become a partner serving Russia's energy and military interests.

As a result, Germany probably will seek to accommodate Greece. This task will not be easy, because a number of conservative members of the German parliament oppose loaning money to Athens. Most likely, the Eurogroup will break the final tranche of Greece's bailout into smaller installments, each linked to reforms. German lawmakers will protest but ultimately approve this decision.

A Battle at Home

Athens' main problem will not come from abroad, but from home instead. Greece is ruled by a coalition that includes Syriza and the nationalist Independent Greeks party. Syriza campaigned on a promise to end the introduction of austerity measures and to renegotiate Greece's debt. Athens was forced to abandon some of those promises in its initial negotiations with the Eurogroup, irritating some of the more radical members of Syriza and the Independent Greeks. The Greek government will probably reach an agreement with the Eurogroup, but Tsipras and his team will have a hard time selling it to their own lawmakers.

Protests from within its own ranks have forced Athens to seek delicate compromises. For example, the most left-wing members of Syriza oppose the privatization of state-owned enterprises, especially utility companies. But the European Union is pressuring Athens to sell public companies to improve government revenue. These contradictory requests forced the Greek government to say that Athens would not stop privatizations already in progress, but future operations would look for "strategic partnerships" between the Greek state and foreign investors instead of complete privatization.

So far, a political crisis has been averted because the parliament has voted only on non-controversial issues, such as introducing food stamps and granting cheap electricity for poor households. But Athens wants to start receiving money fast, which means that in April the parliament will have to pass some of the reforms that were promised to the Eurogroup. Only then will the actual number of "rebel" lawmakers become clear.

The Greek government controls 162 of the 300 seats in parliament, a slim majority. Tsipras cannot afford a rebellion within his coalition. Short of formally opposing the government, upset lawmakers could chose to abstain or be absent from the vote on controversial measures, keeping the government alive but constantly threatening its fall.

Tsipras could look for external partners to pass legislation, but he has few options. He would not turn to the two mainstream parties, the center-right New Democracy and the center-left Panhellenic Socialist Movement, or to the far-right Golden Dawn. The most likely option would be To Potami, a small centrist party that, like Syriza, criticizes the country's establishment. Turning to parties outside the ruling coalition so soon, however, could severely erode the government's power.

Regardless, Greece's political situation will stress its government and weaken or delay the implementation of whatever promises Athens makes to its lenders. Between April and June, the Eurogroup will provide Greece with enough money to prevent a default. After Greece's bailout ends in late June, Athens will have to find a new agreement with its lenders. The European Union will want to keep Greece in the eurozone, but it will also make demands.

Syriza was elected to renegotiate Greece's debt, end austerity and keep Greece in the eurozone, but it will not be able to achieve these goals simultaneously. At this point, domestic pressures on the Greek government could force it to seek popular approval before making a decision on the future of the country. The most significant threat for Athens will come from within, which could lead to early general elections or even a referendum on Greece’s membership in the eurozone.

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