Words matter. By shaping expectations, they can move markets and economies a lot. On the positive side, ECB president Draghi ended the systemic euro crisis on 26 July 2012 when he declared that the ECB would finally step up to the plate and do „all it takes“ to keep all countries in the euro that respect the rules. Rarely have a few words done so much good. But by now we also have a negative example. Rarely has a new government done so much economic damage in such a short time as Greece‘s double-populist coalition that swept to power on 26 January by promising its voters three impossible things in one campaign. Eight weeks later, the new government has, oddly, done hardly anything. Very few laws have been passed, very few serious decisions have been taken in Athens. But with mere words, those used in the election campaign and those thereafter, the union of the radical left („Syriza“) and its leaders have already had a devastating impact on Greece.
After an extraordinarily rough crisis in which all sides including the Greek authorities and the troika of internal supervisors made major mistakes, Greece was finally on the mend over the course of 2014. Annualised GDP growth of 2.4% in the first three quarters of 2014, a serious rebound in employment, a 2.8% gain in real wages, a 7% year-on-year rise in exports of goods and services in Q3 2014 and a primary fiscal surplus that in November was still on track to reach 1% of GDP for 2014 highlight the breadth of the recovery that was unfolding. Having placed a five-year bond last autumn, Greece was on track to exit its European bail-out programme with no more than a precautionary credit line at some time in early 2015.
With the rise of political uncertainty and the subsequent change from the Samaras to the Tsipras coalition in Athens, almost everything seems to have gone downhill badly since early December. As scared Greeks pulled money out of their banks and cancelled investment plans, capital flight reached a total €50 bn in just three months (December through February) judging by Greece’s surging Target2 liabilities within the Eurosystem of central banks. That is equivalent to almost 30% of annual Greek GDP. And all this just because the Greek populists have scared money away and apparently paralysed part of the Greek economy with careless talking and impossible policy proposals.
We still see a 75% chance that Greece, with a bargaining position much weakened by the new government, will strike a deal with its creditors over the next month or so that can keep the country in the euro. But it is an uncertain call. With Greece having to resort to ever more desperate measures to pay its bills, things look set to come to a head shortly. Whether the „reform list“ Greece wants to send to its creditors by the end of today will come anywhere close to the meeting Greece’s obligations under its support programme is a very open question, to put it mildly.
Syriza and its ultra-right coalition partner have shattered economic and financial confidence. Rebuilding trust is possible but will take time. As a result, Greece may well need a further troika-supervised support programme of some €30bn this summer after the dispute about the conditions for releasing the final €7.2bn tranche of the current programme has been settled. If Greece returns to the path of reform trodden by the Samaras government, granting Greece such a new support programme would be worth it. Having tamed a Tsipras would be quite an achievement. A country returning to the reform path would be able to bear and service the debt at the very low interest rates which official creditors can offer to countries that strengthen their growth potential by meeting the conditions. But before any such discussion can start, Greece must first prove that it is serious about meeting its commitments under the old support programme, and it probably must do so fast.
One likely impact of the mess which the new government in Athens is creating in Greece is becoming clearer. Because Syriza is showing Europe how costly populist policies can be, the mounting troubles of the new Greek government seem to be deflating the allure of populists elsewhere in Europe. As sad as the Greek troubles are, this collateral benefit may eventually turn into a little consolation from a European perspective.