Explainer: Do the Greek elections spell a Grexit?

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Among Tsipras’s first orders of business will be a round of tough negotiations with Greece’s creditors, who have bailed out the country to the tune of €240 billion on condition that Greece pursues a system of austerity.

In his victory speech, Tsipras set the stage for a showdown, declaring « Europe is going to change. »

In his victory speech, Alexis Tsipras set the stage for a showdown, declaring Europe is going to change.

In his victory speech, Alexis Tsipras set the stage for a showdown, declaring « Europe is going to change ». Photo: AP

« The sovereign Greek people today have given a clear, strong, indisputable mandate, » he said.

« Greece has turned a page. Greece is leaving behind the destructive austerity, fear and authoritarianism. It is leaving behind five years of humiliation and pain. »

Although Tsipras has formally said he does not want to leave the euro, his party’s hardline anti-austerity policies have not been looked on favourably by Greece’s creditors, namely Germany.

As both sides go to the trenches in the coming weeks, here are the most likely scenarios to come from the negotiations.

Successful re-negotiation on debt

Under an international bailout involving the International Monetary Fund, the European Central Bank and European Commission – the « troika » – Greece has borrowed nearly €240 billion ($343.8 billion).

On the table is a final bailout tranche of €7.2 billion ($10.3 billion), but the troika has made it clear this remaining aid is conditional on Greece implementing further austerity measures.

While Tsipras has made it clear he wants to end Greece’s austerity, the country is still battling astronomical debt – about 175.5 per cent of gross domestic product – as well as 26 per cent unemployment, including 50 per cent youth unemployment.

If Syriza don’t agree to more austerity conditions, Greece won’t get the loans it needs to avoid default by the summer, which would all but shore up a Grexit. 

Tsipras will probably go to the negotiation table seeking the final bailout sum and a reduction in Greece’s debt or an easing of the terms of repayment. But for the troika to agree to refinance Greece’s loans, Tsipras will have to scale back some of Syriza’s more profligate policies, including his promise to increase public expenditure and expand the public sector payroll.

However, even with some concessions from Syriza, the key issue will remain: Greece won’t be able to pay off its debt any time soon.

Despite the friction, a negotiated outcome is most likely, because it suits neither side’s vested interests – Greece or its main creditor Germany – for Greece to leave the eurozone. This brings us to the two other potential scenarios, both of which contemplate a Grexit.

Greece defaults on debt

The attractiveness of a debt-free life outside the eurozone might lead Greece down the path of default. Abandoning its debt and leaving the eurozone would mean Greece would be instantly locked out of international markets, leaving it to fend for itself with a newly reintroduced drachma. It would then have to print drachma to fund its policies, leading to rampant inflation.

While a devalued drachma might entice more holidaymakers from around Europe, a bolstered tourism industry wouldn’t be enough to stimulate Greece’s economy to the extent it needs in the short term to fund its public service and welfare programs. With an ailing economy, and massive unemployment, there are few clear ways Greece could generate income without reliance on outside funds. In short, the consequences for Greece of leaving the euro are unpredictable, but at the extreme end it could result in internal economic catastrophe, with skyrocketing inflation, recession and the possibility of Greece’s banks collapsing.

For this reason, many commentators predict Syriza will be the first to blink in the debt negotiations.

Greece pushed towards exit

There is a possibility that Greece could be strong-armed by its creditors towards an exit by them refusing to consider Syriza’s debt-restructuring pleas. This theory is based on speculation that Germany is fed up with pumping money into Greece and that a cost-benefit analysis now favours Germany cutting its needy neighbour loose.

Other commentators have been quick to reject this. First, a Grexit would set an unsettling precedent that might trigger some of the other struggling countries in the eurozone, such as Spain or Italy, to follow.

It is also not in Germany’s interest for the zone to splinter – euro membership increases Germany’s annual economic growth by 0.5 per cent of GDP.

As Bloomberg contributor Leonid Bershidsky notes:

« Germany stands to gain €1.2 trillion from it between 2013 and 2025, much more than it would contribute to any Greek bailout. The amount Germany could lose if Greece reneged on troika debt – €70 billion in taxpayer funds – pales in comparison. »

Publicly, German Chancellor Angela Merkel has maintained her support for Greece remaining in the euro, affirming in January that she had « no doubt whatsoever » that a « successful conclusion » would be reached with Greece.

 




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