Greece's parliamentary elections on January 25th promise to reopen the eurozone crisis just as the European economy risks tipping into a deflationary period of no growth and continuing high unemployment. The radical left-wing Syriza party is ahead in the opinion polls and is pledged to renegotiate the country's high debts owed mostly to the European Central Bank and the International Monetary Fund. It wants to reverse welfare and jobs cuts imposed on Greece while staying in the euro. Were the party to form a government and carry through these policies there would be major consequences throughout the eurozone.
Greece was framed in German political debate and media as an irresponsible and untrustworthy spendthrift state after its finances were exposed as corrupt at the beginning of the eurocrisis in February 2010. Exceptional political energy was devoted to the task, along with a huge effort to bail the state out with strict conditionality and by creating new EU instruments. Political and financial precedents set then determined how German and other northern European treated the crisis in Spain, Portugal, Italy and Ireland since then. The assumption of moral hazard if debt is written off and the insistence on deep structural reforms and cuts in expenditure were mainstreamed.
The formula has certainly helped to save the currency, but at enormous social cost and increasingly too at the cost of economic recovery in the most affected southern member-states of the euro, whose poor performance is affecting the whole European economy. This unexpected Greek election, arising from a failure to elect in new president in its parliament, suddenly projects these major problems onto the wider European stage. A victory for Syriza would dramatise not only Greece’s socio-economic problems but those in other heavily indebted states. Its demands to relieve debt and plan for economic recovery express a popular impatience with austerity policies and represent a potential breakthrough in the politics of the crisis.
It is a risky business, of course, as markets size up political will in Athens, Brussels and Berlin and as rumours are floated that the German government now believes the euro could survive if Greece exits, having been refused a renegotiation of its debts. Syriza may not win the elections as expected as Greek voters respond to such pressures; and even if it does it will not have an overall majority but will have to make alliances to form a government, diluting its programme and making a compromise more possible.
Even if this is so, the radical demands expressed in this election campaign make sense on that wider stage. The European economy cannot recover with this level of indebtedness. It must be reduced - by radical extensions of repayment periods if not by repudiation - and by much larger national fiscal stimulus and EU wide-investment programmes than are now officially contemplated. Since 2010 the economic and currency crises have driven change within the EU and the eurozone, forcing reluctant political leaders to address shortcomings of policy and institutional design. This year promises to develop within that mould, as voters in Spain pay careful attention to what happens in Greece and voters elsewhere, including Ireland, do likewise.