Greece's elections

By THE DATA TEAM

GREECE will have a new prime minister, and Europe its first anti-austerity government, following elections on January 25th. Syriza, a left-wing party led by Alexis Tsipras, claimed around 36% of the vote, an eight-percentage-point lead over the New Democracy party of Antonis Samaras, the outgoing prime minister. Syriza’s support leapt by nine percentage points compared with the 2012 election result; the biggest loser was PASOK, a centre-left party and member of the current governing coalition. Syriza fell just short of an absolute majority, winning 149 seats in the 300-seat parliament. Mr Tsipras seems set to form a governing coalition with the small right-wing Independent Greeks party, which won 13 seats.

Syriza’s appeal to voters is simple. Greeks are fed up after enduring six years of deep recession, with the prospect of more years of austerity to come. Alexis Tsipras, the party’s leader, says it is committed to remaining in the euro, but also wants to alleviate its massive debt burden, now running at more than 175% of GDP, in order to fund higher spending. In a victory speech in Athens, Mr Tsipras told supporters that the "troika" of institutions (the European Commission, the European Central Bank and the IMF) that oversees Greece's bail-out programme was a thing of the past. The question for the rest of the euro area is how far Syriza will go to pursue its stated agenda of nationalisation, debt restructuring and reduced austerity. Even though Greece now runs a primary budget surplus and a current-account surplus, it cannot be too cavalier with its international partners. Greece’s current bail-out deal with its European partners runs out at the end of February, and Greek banks still use the European Central Bank for refinancing needs. A stand-off with the central bank is one Greece could not win, raising the prospect of a forced exit from the euro.

The fears aroused by “Grexit” have never been about the size of the economy. Greece’s outstanding debt burden is around €300 billion, compared with more than €2 trillion for the likes of Italy and France. The worry is much more about how interconnected Greece is with the rest of the euro zone. In one big respect at least, the situation is much more containable than it was when the crisis was last raging. Since the country’s debt-restructuring deal in 2012, the bulk of Greece’s sovereign debt has been in the hands of the IMF, the European Central Bank and the European Financial Stability Facility, the EU’s crisis-resolution fund. If Syriza were unable to negotiate a debt write-off, and led Greece out of the euro, it is clear who would be hit by an ensuing default. Any contagion would be more likely to come from the demonstration effect of a Greek exit than any direct financial implications. The conversion to the euro was meant to be irreversible; that principle would be destroyed if Greece left.

The result of the Greek elections sent yields on Greek government bonds higher, but left bond yields in other peripheral euro-zone markets relatively unmoved. On balance, that looks right. The risks to Greece of introducing a new currency are sufficiently large, and that to Europe sufficiently contained, that Syriza may well blink before the rest of Europe does in negotiations over Greece’s debt burden and austerity plans. That would not be any answer to the euro’s problems, however. Syriza’s popularity, and that of other populist parties in Europe, rests on the idea of an unfair dispensation in the euro zone, in which (depending on where you live) richer countries are bilked or poorer economies are throttled. A sullen Greece, led by a thwarted Syriza, would risk reinforcing that narrative, not change it.