Greece Stands Alone in Its Fight for Debt Relief

6 MINS READFeb 20, 2015 | 10:12 GMT
Greece Stands Alone in Its Fight for Debt Relief
Greek Prime Minister Alexis Tsipras attends the presidential vote at the Greek parliament in Athens on Feb. 18.

All eyes in the eurozone are fixed on Greece these days. The question whether to grant Athens debt relief is generating intense debate in the eurozone periphery, and negotiations over Greece's debt could ultimately end with the country leaving the currency union. In theory, countries such as Spain, Portugal, Ireland and Italy should be supporting Greece, since debt relief for Athens could enable them to demand the same. In practice, however, the Greek government has received little support from its neighbors, mainly because of their own political constraints. Though the anti-austerity movement will eventually gain impetus in periphery countries, it will not spread fast enough to help Athens in its current standoff with Germany.

Since the Coalition of the Radical Left party, known as Syriza, won Greece's general elections Jan. 25, eurozone finance ministers have met several times to discuss the party's plans to seek debt relief. Its proposals include lowering Greece's fiscal surplus targets and introducing a debt swap to link a part of the country's debt to economic growth and to create "perpetual bonds" held by the European Central Bank.

Greece originally proposed an end to the supervision of its economy by the troika — the European Commission, the International Monetary Fund and the European Central Bank — and to replace its bailout program with a "bridge program" while it negotiated the terms of its debt. But on Feb. 19, Athens softened its position, requesting a six-month extension of the existing bailout program and accepting continued supervision by the European Union and the IMF. Notably, Greece also suggested implementing a 2012 agreement with the European Union, under which Athens would receive extended maturities and lower interest rates on its debt. However, Germany remains skeptical and wants a stronger commitment from Greece on structural reforms and spending cuts. Eurozone finance ministers will debate the proposals on Feb. 20.

Since late January, Greek officials have visited several European capitals to garner support for their cause. The most Athens has received in recent days is cautious support from the European Commission, which is trying to act as a neutral intermediary between Greece and Northern European governments. Greece was especially counting on support from the eurozone periphery, but this has not materialized, purely for political reasons.

Ireland, Portugal and Spain have conservative governments that requested bailouts from the European Union and the IMF at the height of the financial crisis, and they implemented painful and unpopular austerity measures in exchange. These governments invested significant political capital in defending structural reforms and debt repayments, so they cannot support concessions for Greece that they did not ask for themselves. Moreover, these countries are wary of pushing for concessions when it looks as if Germany will maintain a hard line on Greece.

The situation is slightly different in Italy and France, two countries that Syriza began courting after taking power. Rome and Paris have center-left governments that are more aligned ideologically with and sympathetic to Athens. However, Italy and France have their own budget disputes with Germany and are hesitant to open another battlefront with Berlin by endorsing the Greek cause. These factors have left Greece relatively isolated in recent meetings of eurozone finance ministers. If Athens was counting on Mediterranean Europe to come to its rescue, all it got was sympathy and nervous smiles.

Debtor Countries Watch and Wait

Though European debtor countries are unwilling to champion Greece's cause at the international level, they are still having internal debates about the country's fate and what it means domestically. In early February, Ireland's agriculture minister said if Athens were given any form of debt relief, Dublin would demand the same. Also in early February, left-wing members of Italy's ruling Democratic Party sent a letter to Italian Prime Minister Matteo Renzi asking him to support Greece in its negotiations with the European Union. In Portugal, the opposition Socialist Party, which is leading opinion polls, is having an internal debate on how to handle Portugal's debt. Finally, Spain's Podemos, which opinion polls also show receiving the most popular support, is running on a platform centered on debt restructuring.

Most countries in the eurozone periphery agree that the era of painful spending cuts and tax hikes should end, and they believe that the European Union should take a more flexible approach regarding its debt and deficit targets. To varying degrees, all periphery countries support plans to boost investment in the eurozone and want more time to reduce their deficits. Because of this pressure, Brussels will likely be lenient with countries such as France and Italy when it reviews their budgets in March. More important, there are substantial segments of the population in these countries that oppose Germany's lead role in negotiations and that would support renegotiating debt or leaving the eurozone altogether.

The elements for renewed clashes with Germany are present in the eurozone periphery, but the timing is not in Greece's favor. Elections that could bring governments to power that are more sympathetic to Greece are still months away. Spain and Portugal will hold general elections in the final quarter of the year. Podemos will have a strong performance in Spain, and the Socialists will make substantial gains in Portugal. Ireland will hold elections in the first quarter of 2016, and the nationalist Sinn Fein is performing well in opinion polls. Italy does not have elections scheduled this year, but opinion polls show that opposition to the euro is growing among Italians and will be a key issue in future electoral campaigns.

Greece is setting a precedent for its neighbors. If Athens successfully renegotiates its debt, others will feel encouraged to follow. But if Greece fails to reach an agreement with its lenders, defaults on its debt and leaves the eurozone, voters across the European periphery will be scared to make similar demands. Greece will eventually return to economic growth, even if it defaults on its debt. But if it leaves the eurozone, it will probably go through a period of deep economic distress and political fragility that would likely last through the elections in Spain, Portugal and Ireland. The irony of what has been termed a "Grexit" is that it would temporarily lead to greater support for the euro in the rest of the eurozone, even if only because of momentary fear.

Greece, for now, is stuck negotiating its future alone. Athens and its lenders will probably reach a temporary agreement in the coming days, but this will only buy them time for more difficult negotiations later this year. In addition, Athens' recent concessions to its lenders are potentially dangerous at home, where Syriza would face a backlash if it strayed too far from its electoral promises. The anti-EU wave will eventually spread to other countries in the eurozone periphery but not in time for Athens to benefit. The economic malaise in the European periphery will create a fertile ground for anti-establishment parties to succeed, but should Greece leave the eurozone in a disorderly way, the resulting chaos would temporarily hurt these emerging parties. In the meantime, periphery countries are treading carefully while they plan their next moves.

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