Seven long years after the collapse of Lehman Brothers, the doctrine of austerity that has held sway in Europe since the crash has been conclusively rejected by a major European electorate.
There had already been false dawns: the election of Francois Hollande in France in 2012 was supposed to signal to Brussels that austerity wasn’t working. Riding a wave of anti-austerity sentiment, the new President promised to squeeze the rich and invigorate the French economy with Keynsian stimulous.
And yet the French election of 2012 wasn’t to be the transformative turning point it was initially billed as. Soon after taking office Hollande rowed back on many of his pre-election pledges and embarked on his own programme of cuts. It was the anti-austerity revolution betrayed once more.
But the election of Syriza in Greece feels different, not least because the country has suffered far greater hardship from the doctrine of austerity. Since the onset of the recession in 2008, Greece has lost around a quarter of its economic output and 26 per cent of the country’s population are currently unemployed.
This, supposedly, was the price ordinary Greeks were supposed to pay for the Troika’s (the European Union, the International Monetary Fund and the European Central Bank) 2010 bailout of Greek banks: the Greek government was granted €240bn but strictly on the condition that it implemented a brutal austerity programme.
The election of Syriza over the weekend means that, for the time being at least, that ship has sailed.
Already the continent’s austerity hawks are circling Greece with dire warnings of impending chaos and penury. David Cameron this morning tweeted that the “Greek election will increase economic uncertainty across Europe”. Meanwhile Bundesbank President Jens Weidmann said he hoped “the new Greek government will not make promises it cannot keep and the country cannot afford”.
Right-wing political leaders sound worried and they ought to be: Greek voters have categorically rejected a key plank of the eurozone policy for dealing with the fallout from the financial crisis: cuts, cuts and more cuts.
This poses two big questions: how will German Chancellor Angela Merkel respond? And how will European centre-left parties react to the election of a radical anti-austerity party?
The new Greek government must come to some agreement with the ECB by 28 February, which is when the current deal with the Troika runs out. Should this fail to happen, Greek’s deal with the ECB will officially come to an end, triggering a run on Greek banks. The ECB could then offer to recapitalise the banks but with enormous strings attached – think neo-liberal reforms and further austerity.
However the size of Syriza’s victory (and the message it sends to European elites) means that the sensible money is on party leader Alexis Tsipras successfully renegotiating the 2010 bailout terms with Brussels. Tsipras won’t get everything his party wants from the ECB but will probably get enough to paint it as a victory for beleaguered Greeks. With an eye on polls showing that 70 per cent of his countrymen want to stay in the euro, the Syriza leader won’t want to be the one who takes country back to the Drachma.
As such, expect Greece to stay in the Euro but expect the unity of Syriza to be short-lived: any compromise with the ECB will invariably be painted as a ‘betrayal’ by the party’s hard-left.
A compromise is made more likely by the fact that, while Merkel and the ECB won’t want Greece to leave the Eurozone, ‘Grexit’ wouldn’t be the unmitigated disaster for the rest of Europe that it once might have been. Since the dark days of 2010 Bank restructurings and ECB liquidity have significantly reduced the risk of potential Europe-wide contagion, meaning that Grexit would be a challenge for Europe rather than a disaster. The hand of Greece’s creditors is therefore strengthened.
The other big question is how European leaders of the centre-left react to the emergence of Syriza as Greece’s largest party. Will Tsipras’s victory provide Hollande in France and Matteo Renzi in Italy with an opportunity to push back against Brussels and Berlin-backed budgetary constraints? Combined with ECB president Mario Draghi’s intervention last week, does Syriza’s triumph further isolate the hawkish Merkel?
It ought at the very least to give the left a stronger hand when arguing the toss with Merkel over the best way to reinvigorate economies that are still feeling the pain from the 2008 crash.
This article was originally published by Left Foo tForward.