The Greek government has submitted 11th-hour concessions to its creditors ahead of an emergency summit of EU leaders to negotiate a deal that will save the country from defaulting on the €1.5 billion IMF loan. Following five months of deadlocked talks, it has become clear that the Syriza government cannot achieve its pre-electoral pledges.
If no agreement is reached, Greece will default on its loan and a Grexit will be incredibly likely. But conceding to the demands for spending cuts and welfare reforms that will form part of any deal with its creditors is likely to cause a political rift at home for Syriza leader and Greek prime minister, Alexis Tsipras. It would seem then that the government’s dilemma is a break with Europe or a break-up of the party.
Break in the ranks
The gap between the Greek government and its creditors has drawn much closer since negotiations began in January. Indeed, if Greece’s latest proposal is accepted, the resulting agreement will be a long way off the promises on which Syriza was elected five months ago. It guarantees the running of primary budget surpluses – albeit significantly smaller than before – and continues the policy of fiscal austerity.
This agreement will be unacceptable to Syriza’s hardcore, who consider themselves to be the party’s conscience. For them any agreement, which recognises the legality of debt and perpetuates austerity, is a clear betrayal of the party’s principles.
Moreover, for them it would be a strategic mistake to miss the present opportunity, while they have a considerable amount of popular support and anti-European sentiment is unusually high, in order to break with Europe and leave the euro.
Consequences of a Syriza split
An agreement that is acceptable to its creditors will has a strong chance of leading to the breakup of the Syriza Party. The government will lose its parliamentary majority as a result and will have two options. Either call elections or take on a new partner (most likely the To Potami party). Collaboration with a new partner is unlikely to be smooth and both sides will act with one eye on a future election.
Elections are therefore inevitable and Syriza will have every interest to hold them before the collection of income and property taxes, which will begin in earnest over the summer.
In the run-up to these elections, the opposition will no doubt argue that the agreement signed by Syriza is no better than the previous one and that the long negotiation in order to reach it only managed to seriously weaken the economy, which had begun to recover in 2014. Nevertheless, it is very doubtful whether it will be able to stop Syriza from being the party with the highest number of votes. So Syriza could again be in government, albeit without its revolutionary wing. The road will then be open for its transformation into a European-style social democratic party, which will be judged mainly on its success in improving the economy’s competitiveness and growth rate.
If no agreement is reached
Let us now briefly consider the possibility that no agreement is reached. This will happen if the government’s dilemma is resolved in favour of preserving party unity. It will mean that the neo-bolshevik wing has gained the upper hand, with the support of the vast state-dependent section of society that oppose the structural reforms.
If no agreement is reached, Greece will default on its IMF loan and make Grexit incredibly likely as a result of the country’s liquidity problem. There should be no doubt that the consequences of this will be catastrophic.
Although there is general agreement that this will be the case in the short-run, there are some commentators who believe that in the longer run regaining control over its monetary policy and exchange rate will enable Greece to escape austerity and restart economic growth. They are wrong.
Without structural reforms that improve the country’s competitiveness and overall productivity, there can be no economic growth. The government that decides on Grexit will do so precisely to avoid making such reforms. It will immediately expand the state and embark on the path of constructing a neo-communist regime that fails to take into account the private sector of the economy. It will run budget deficits that buttress its sources of support, stoke inflation in the absence of productivity growth, and impoverish Greece by continuously devaluing the new currency’s exchange rate.
It is evident that Greece is at a critical juncture and the momentous decision about the road to be taken is largely in the hands of Syriza’s leader who maintains substantial support domestically. His inclination would be to ask for more time, even though this will further depress the economy. Beyond that, Alexis Tsipras’ mind is not easy to read.
Thanos Skouras does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
Authors: The Conversation