The stunning triumph of the Radical Left party during Greek elections at the beginning of this year has reignited the fear of a new European crisis for some, generated hope for others. Syriza, the party of Alexis Tsipras, which has swept more than 35% of total votes on the 25th of January and has currently 149 seats out of 300 in the Greek Parliament, seems determined to retake control of the country’s economic fate and to curb austerity.
Greece, a country without monetary and fiscal sovereignty
It is well known that a country that enters the Eurozone has to leave its monetary policy to the ECB. This implies for example that this country’s central bank will not be able anymore to print money in order to devaluate its currency and provide a short-term boost to the economy when times are tough. Since its entry in the Eurozone in 2001, Greece is of course no exception to that principle.
In addition to this first renunciation of sovereignty, Greece has also abandoned its fiscal autonomy in May 2011. At the height of a severe solvability crisis and confronted with the galloping fear of the markets, the country had indeed no choice but to ask for a bailout to a group of lenders led by the IMF, the ECB and the European Commission. In exchange for that help and in a move to tame the panic of the markets, the country was forced to embark on an “economic adjustment program”. Greece had to ask for financial assistance to the troika [a nickname for the ECB, the IMF and the European Commission] and give up on its independence with regard to fiscal policy. Since then, Greece has been swept into a set of deep austerity measures that have profoundly affected the country’s real economy.
The benefits of austerity
Nearly five years after 2011, the effects of these austerity measures on Greece’s real economy can already be assessed. The country is still in recession, its economy is shrinking, consumer spending is historically depressed and unemployment rate has risen sharply from less than 20% in 2011 to more than 25% in 2014 [see graphs below].
Moreover, the country has fallen into outright deflation since 2013, which is no particular good news [see our previous article “Deflation for dummies”, SSR n°1, available on our website]. As austerity has dreadful effects in the short run, it also has negative effects in the long run. Long periods of high unemployment can indeed lead to a persistent deterioration of the quality of a country’s workforce, a phenomenon known as hysteresis.
So, what are the expected theoretical benefits of austerity? According to J.M. Keynes, austerity measures should be implemented mainly in boom periods in order to impede the economy from overheating and smooth the fluctuations of the economic cycles. This is, in a nutshell, the traditional benefit of austerity. In recession periods though, more spending should be required in order to stimulate the economy.
In this current context, Syriza and its leader, Alexis Tsipras, are of course not devoid of some criticisms. Syriza is a populist party that is not afraid to play political games in order to sway voters.
As an example, one would easily remember how, in 2012, Mr Tsipras changed his stance about Greece having to leave the Eurozone…a turnaround that many interpreted as an attempt of the young leader to remain in line with voters’ opinion that was clearly against such a “Grexit”. Moreover, many of the reforms proposed by his party such as the elimination of taxes on heating fuel and property, the revival of the 13th month bonus pension for the poorest pensioners or limited free electricity to 300,000 households (!) are nothing but structural and seem to be there firstly to please voters. On the other hand, there is hope. Syriza is a nontraditional party that is not part of the Greek establishment. Its intention to adopt structural measures in order to clamp down on corruption (something that its predecessors have never wanted to undertake) is laudable. The question whether Syriza will revive Greece remains open at this stage. In the meantime, rooms for improvement are definitely there.