Greek government: The moment of truth is inexorably approaching

Greek PM Alexis Tsipras

In fact, Tsipras’ insistence on of pushing for a “political deal” is going nowhere: German Chancellor Angela Merkel, who he will meet in Berlin next Monday, 23 March, is unlikely to deviate from her preference for technical, rule-based solutions. Therefore, the risk of an internal default due to the inability to pay salaries and pensions is not negligible.

Leaving aside the cash crunch challenge, the government’s nationalist strategy is setting the stage for a period of intense turmoil and uncertainty. The 25 January elections were won by a broad nationalist-populist coalition and not by a mere leftist party. While it may have appeared as an odd coupling at first, the coalition deal between SYRIZA and the Independent Greeks is based on at least two commonalities: a narrative of resentment against one enemy (the troika and its domestic servants) and one solution (end of austerity by not recognizing the bailout agreement).

As a result, the crisis has been squarely blamed on the bailout agreement and on foreign entities like the troika, who allegedly left Greece’s economy, sovereignty and pride in tatters. The main effect of this narrative of national liberation has been to delegitimise those who argued that austerity and substantial reforms were needed to address the country’s dire economic and financial situations. Instead, SYRIZA’s early initiatives all resonate with the country’s traditional clientelistic approach to policy-making, including the rehiring of cleaners at the finance ministry, salary increases for workers at the public power corporation and the pledge to reopen the public TV station (ERT).

Little cohesion, little experience

Tsipras has not hesitated to take a bold stance vis-à-vis Greece’s creditors, most notably by reviving the issue of war reparations from Germany and by attacking Spain for its alleged anti-SYRIZA attitude. In contrast, he has been treading lightly with factions within his party, which have been undermining the already tough negotiations with the creditors. The 11-hour long party meeting in the aftermath of the loan extension is not just a reflection of Tsipras lacking a dominant position within SYRIZA but also of his unwillingness to confront the party’s more leftist factions. Similarly, a light touch has characterised the PM’s handling of his cabinet, despite repeated contradictory and provocative statements by various ministers.

SYRIZA is also paying the price for its lack of experience and its limited exposure to the outside world before winning the elections. The comments made by its leaders still largely reflect the modus operandi of a party unable to rise above its past experience in opposition and to adjust to the fact that both domestic and foreign policy require a more nuanced and sophisticated approach. The net result is that Greece has never been so alone during the eurozone crisis. It is difficult to see how the situation could improve in the crucial weeks ahead as Athens and its European partners embark on the fraught discussions over a new package/program that needs to be agreed before the end of June.

Bold moves

Even if Greece overcomes its short-term financing challenges, June will be the crucial flashpoint. The government will only implement the less contentious reforms in the weeks ahead in the best-case scenario, sidelining controversial matters like the growing fiscal gap or pension reform, which will need to be addressed when a new package is discussed. Creditors are likely to press for bolder reforms and measures, which in turn could spark frictions within SYRIZA and make it much harder for the PM to keep the party in line.

Against this difficult background, the only way out for Tsipras could be a referendum to gain a fresh mandate, secure public backing for the new deal, and impose intra-party discipline. Such a vote would probably yield a majority in support of the new agreement. However, the government would face some crucial difficulties to organize it:

a) Greece’s constitution does not allow referenda on fiscal matters;

b) it is unclear whether a vote could be held without imposing capital controls as the country may experience significant capital flight; and

c) it would have to be organized before the payment is due for the first of the two bonds held by the European Central Bank and eurozone national central banks (20 July).

A less likely option is calling new elections. This would entail significant risks for SYRIZA as the gravity of the situation may boost New Democracy (as it did in the second elections in 2012). Alternatively, dissidents from SYRIZA’s left platform may pull out of the government and potentially the party, paving the way for a possible reconfiguration of the government. However, this would produce another unwieldy coalition that is unlikely to yield much apart from buying Greece some time.

Grexit at 20 percent

Despite this difficult outlook, a euro exit is still unlikely (20 percent probability). SYRIZA has no mandate to take the country out of the eurozone (the Greek public is still largely pro-euro), and the government would implode well before any meaningful discussions on the matter. Furthermore, any decision on such an issue will crucially depend on the opinion of Brussels, Frankfurt and Berlin, not Greece alone. Despite the recently toughening rhetoric on all sides, these players remain committed to keeping Greece onboard. Still, Eurozone partners and especially Germany will continue to push for technical solutions rather than the “political deal” sought by Tsipras.

*Wolfango Piccoli is a managing director at Teneo Intelligence. He serves as director of research and also covers political risk in Europe, with a special focus on Italy, Greece and Turkey.

Follow Wolfango: @wolfpiccoli

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