Will Greece or Germany blink first in a euro-zone game of chicken?

Stratos Pourzitakis says both are likely to stand firm on the handling of Greek debt

PUBLISHED : Wednesday, 28 January, 2015, 1:55pm
UPDATED : Wednesday, 28 January, 2015, 7:29pm

Syriza's landslide victory will be a game changer for Greece, either ending economic stagnation or leading to a euro-zone exit. Despite widespread optimism among Greeks that the new government can improve the economy and remain in the euro zone, in reality, the chances of a "Grexit" are very real: Syriza's anti-austerity agenda threatens to put Athens on a direct collision course with Germany.

After winning 149 seats in the 300-seat parliament, Syriza has formed a governing coalition with the right-wing party Greek Independents. The two diverse parties have found common ground in their anti-austerity rhetoric and hostility towards Germany and the troika of the European Commission, European Central Bank and International Monetary Fund.

Syriza's victory should come as no surprise in light of the mounting public dissatisfaction with the previous coalition of New Democracy and Pasok, which implemented the bailout austerity measures that Syriza calls "fiscal waterboarding".

Yet, the new government will face serious challenges. New prime minister Alexis Tsipras has pledged to renegotiate Greece's €240 billion (HK$2.1 trillion) bailout programme and push for a new debt haircut. In response, European Union leaders have ruled out a new write-down. What is more, if it is to be included in the recently announced quantitative easing programme, Athens needs to reach a deal with the troika on the ongoing bailout programme.

Syriza has promised to boost public spending, re-examine investment agreements, and establish public companies. Apart from being questionable in terms of effectiveness, it is almost certain such policies will be rejected by the troika since they are not in line with the German doctrine of fiscal responsibility.

If Tsipras sticks to his guns, cutting ties with Germany will be inevitable, leaving Greece without access to cheap ECB funding. Inevitably, the Greek economy will come under stress, and in July and August, the government will be unable to repay €7 billion for bonds that will mature. At that point, a euro-zone exit would be the only feasible option.

German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble may not want to "lose" Greece, but they cannot afford to make substantial compromises as any concessions would be exploited by anti-austerity forces in Europe. The popularity of the Spanish left-wing party Podemos and British Prime Minister David Cameron's pledge for a referendum on EU membership diminish the possibility of giving in to Greece's demands.

After all, with approximately 80 per cent of Greek debt now held by euro-zone governments, a Grexit does not spook markets any more. Merkel is also taking domestic politics into account; recent polls show that more than 60 per cent of Germans favour a Grexit should Athens renege on its bailout conditions.

In parallel, Tsipras has limited options because of the Eurosceptic faction in Syriza, which wants to leave the door open to a euro-zone exit. If Tsipras goes back on his word, the odds are that the faction would withdraw its support for the government, leading to new elections, with potentially disastrous consequences.

It appears Greece and Germany are heading for a very serious game of chicken. Who blinks first remains to be seen but if it isn't Germany, then Greece will be doomed, whatever else happens.

Stratos Pourzitakis is a contributing analyst at Wikistrat. He is currently pursuing a PhD at the Department of Government and International Studies, Hong Kong Baptist University, under the scholarship of the EU Academic Programme in Hong Kong