What’s going on in Greece?

by davidcurtisgeorge

With the election of Alexis Tsipras on 25th January, the economic situation in Greece became a matter of international importance, particularly within the European Union.

Prime Minister Tsipras is the leader of the left-wing Syriza Party, who are aiming to remove the austerity measures put into place on the Greek economy by the EU.

Alexis Tsipras, leader of the Syriza Party

History

The ‘Greek Depression’ which is actually still ongoing, came about after their economy collapsed in 2009. This happened because the country was in a level of debt 200% greater than the rest of the EU.

Consequently, the state folded, and European Union member states were forced to bail them out in May 2010, with the help of the European Central Bank (ECB) and the International Monetary Fund (IMF). This came in the form of a €110 billion loan.

The result of this was that austerity measures and structural adjustment policies (SAPs) were enforced, and government assets were privatised – all in the hope that the economy would recover.

What does this all mean?

Austerity measures are the same policies which have been put into place in the United Kingdom under the Conservative-Lib Dem coalition; they largely involve cuts to various public services (education, defence etc), in a bid to lower public spending and therefore pay off the debt.

Structural Adjustment Policies (SAPs) are used by the IMF to overcome deficiencies that are counter-productive to economic growth. These are long-term guidelines which aim to firmly re-establish a struggling state, however tend to ignore the imminent needs of local people.

The privatisation of government assets means that nationalised services (banks, health service and the like) are sold off on the stock market. This is designed to create market competition within these sectors, as well as create new jobs. Unfortunately, it doesn’t necessarily lead to economic growth.

Could Tsipras become a problem?

The election of Alexis Tsipras came about under rather strange circumstances. In Greece, Parliament has to elect a ‘President of State’. The deadline for this election was 29th December 2014; however, since nobody was elected, Parliament had no option but to dissolve, leading to a Snap Election.

The Syriza Party won a minority vote with 26.6%, and formed a coalition with the right-wing Independent Greeks Party.

The new government’s anti-austerity policy makes many investors uneasy; the reason for this is that, by going against the measures placed upon them, they threaten the long-term plan for economic recovery.

Alexis Tsipras has vowed to bring about change within what is now known as ‘Troika’ (ECB, IMF & EU). He believes that, due an improved outlook on economic growth, the measures are now inadequate.

Negotiations are ongoing between Tsipras, the ECB, IMF and EU states. Germany is the country most involved here, with Chancellor Angela Merkel leading the debate.

This cartoon accurately describes what the Greek economy could do to the rest of the world

The main issue is clear; if these austerity measures are lifted, it is possible that Greece will fall back into an economic recession. This is largely due to the fact that, without the SAPs, government spending would increase in an attempt to grow the economy more quickly.

However, the danger is that the state fall into debt yet again, which would have ramifications across the European Union (as they would have to be bailed out again).

In addition, the formation of a coalition with Greece’s most right-wing party means that all governmental decisions have to be passed by both parties; not only does this mean that they lack legitimacy in power, but we’ve seen with the UK coalition government that this is far from an effective solution. Imagine the difficulty when the two parties have utterly contrasting ideologies!

Conclusion

With the Greek economy starting to recover, it is clear that the measures currently in place are inadequate. That being said, it would be foolish to remove them altogether, purely because Greece is still a highly fragile economy.

The ideal solution here is to reform the Structural Adjustment Policies, so that the Greek economy continues to be protected, but can grow at a sustainable rate. It is hoped that the talked between Syriza and Troika reach a similar conclusion.