Following its election, the Syriza government has to face a double fiscal and banking emergency, which is the consequence of the past austerity plans and of the 2012 rescue on public funds of the European banks. A real stranglehold was set up by the Troika and the previous governments, in order to prevent any alternative policy. Breaking this stranglehold is a precondition for implementing a social emergency program. The challenge lies in the choice of the strategy of confrontation with the European institutions, in particular on the two critical issues of debt and euro.

Public finances under stress

On the front of public finances, the Greek government has to make significant repayments on its debt. In 2015 alone, it is supposed to repay € 8.2 billion to the IMF, € 6.5 billion to the ECB, plus € 7.3 billion of interest [1], which makes a total of € 22 billion. This is a considerable amount, which represents about 12% of GDP, or 26% of annual government revenues. Those repayments have to be made in a context of tax revenues lower than expected, since many taxpayers have trouble paying their taxes. The 2016 year should to be less difficult, with about € 13 billion to pay back, but 2015 comes first. There is a real “knife of financial asphyxia” under the throat of the Syriza government, to quote a phrase from Alexis Tsipras.

One also sees that what matters is not so much the total amount of the stock of debt, but rather what has to be paid today. A large debt is much more sustainable if it does not have to be repaid now but in the distant future, when one may expect more favorable conditions. The proposal by Yanis Varoufakis to convert part of the debt into perpetual bonds, even if it does not lower the total amount of debt, remains perfectly consistent with the objectives of Syriza. Its implementation would give back significant leeway to the government, while being more acceptable to creditors than an outright cancellation.

A banking system threatened by asphyxia

The second pressure on the government is exercised through the banking sphere. Beginning with the announcement of new elections, large capital masses began to leave Greece. These movements are mainly due to investors or speculators who expect a Greek exit from the eurozone followed by a devaluation of the new currency, and who seek to protect themselves or to benefit from this situation. These capital flight accelerated after the victory of Syriza, and the banking system would probably have run out of cash without the February 20 agreement at the Eurogroup, which helped stop the bleeding. While saving the banks is not in itself a goal of Syriza, asphyxiation would have dealt a fatal blow to an already fragile economy, given that the private sector gets most of its funding from the banking sector. Moreover, banks are directly involved in government funding, because they buy its short-term debt, and are therefore indispensable at this stage.

In this context of a banking pre-crisis, the ECB decided on February 4 to stop refinancing banks that would offer Greek debt securities as a collateral. This decision of the ECB was highly political—even if it denies it—and was aimed at increasing the pressure on the Greek government. On the one hand, banks have lost a cheap access to liquidity (they still have a more expensive alternative channel), and are therefore more fragile in the face of capital flights. And secondly they will now be less willing to fund the Greek government, as they will not be able to refinance themselves in exchange of public debt securities.

The agreement at the Eurogroup: too early to make a judgment

In this context of fiscal and banking emergency, the Greek government felt that its position was too weak and that it first had to buy time in order to consolidate its position, rather than immediately triggering a confrontation. It therefore sought a technical extension of the macroeconomic adjustment program which was expiring on February 28. A compromise was reached on February 20 at the Eurogroup meeting, followed by the establishment of a list of proposed reforms by the Greek government three days later.

Before making a judgment on the agreement reached, one has to examine the context in which the negotiations took place. In addition to the difficult fiscal and banking situation and to the ECB violent move, the balance of political power was very unfavorable within the Eurogroup: Yanis Varoufakis was alone against 18. Germany, the country with the largest economic weight in the area, was in direct opposition, supported by many others including Spain, another heavyweight. The French and Italian governments, who could have counterbalanced the former countries, preferred to abandon their promises of reorientation of European economic policies, despite the opportunity for change offered by the new Greek situation. And the popular mobilizations of solidarity outside Greece, although real, have not been up to the challenge.

Given this particularly unfavorable context, the agreement reached is certainly not a Greek victory, but it is not a capitulation either. Part of the Thessaloniki program commitments are included in the agreement. But most of these advances (social emergency program, minimum wage raise, universal health care, employment program for the unemployed…) are offset by a commitment to maintain fiscal balance and competitiveness. It therefore seems clear that, at this stage, the outcome is not yet decided, and that in the future each side will invoke its own reading of the agreement: Syriza will apply some measures of its program, downplaying their budgetary impact or emphasizing the revenue from the fight against tax fraud, while the other European states will warn that this constitutes budgetary inconsistency.

Preparing the exit from the eurozone in order to stay in

One element, however, would tilt the balance of power: a credible threat of a debt default. This implies to be prepared for an exit from the eurozone because, even if the treaties do not give the possibility of excluding a member of the area, the ECB could shut down the remaining channel of refinancing, forcing the government to issue its own currency, which would constitute a de facto break with the euro.

What are the costs of such a scenario for the rest of the eurozone? The Greek debt against governments and institutions in the euro area represents about € 300 billions [2], i.e. 3% of the euro area GDP, which is a non-negligible but absorbable shock. On top of this direct financial cost, there are institutional risks which are difficult to assess but are potentially important: risk of a new public debt crisis in peripheral countries, loss of credibility and attractiveness of the single currency, questioning on the purpose of European integration project. And there is also the eminently political risk that Greece's exit from the eurozone turns out to be successful! While some northern European leaders do not rule out a grexit, they are more likely expressing a negotiating posture rather than a genuine political orientation, given the risks and uncertainties.

For Greece, a default and an exit from the euro would have a number of immediate benefits: the reappearance of substantial fiscal margins and the restoration of monetary sovereignty, making it possible to finally get out of the bottomless pit of austerity and to implement the Thessaloniki agenda. The devaluation of the new drachma would induce competitiveness gains; and the loss of purchasing power on imported products could be mitigated by the proceeds of a new tax on foreign tourism [3]. The risks, however, are many: possible legal recourse of creditors, retaliation on foreign trade, temporary loss of access to capital markets, chaotic transition period, speculative attacks on the drachma… Leaving the euro can only be a choice by default, and can only occur at the end of a process of confrontation enjoying strong popular support. However, it is perfectly possible that this exit translates into an economic success, as was the case for Argentina after defaulting on its debt and breaking its peg to the dollar zone.

If the Greek government did not put the grexit in the balance of negotiations, it is because it had not received mandate from voters in this direction, having focused his campaign on negotiations with European partners. The search for a compromise with the Eurogroup was therefore unavoidable, also because it speeds up the awareness about the real nature of the European institutions, as explained by Dimitris Alexakis. The time saved should be used to open a public debate about what it at stake and what should be the strategic directions. The creation of a public debt audit committee, announced by the President of the Parliament Zoe Konstantopoulou, clearly goes in this direction.

The time saved should also be used to design an operational exit plan from the eurozone, which should include capital flow controls, the design and printing of new banknotes, the rebuilding of monetary policy skills at the Bank of Greece, the reconstruction of the banking system (which will be facilitated by the fact that the state is already majority shareholder of 3 of the 4 major banks). Preparing the exit is not at all incompatible with the desire to stay in the eurozone. Instead, the paradox of the situation is that a grexit will be less likely if the exit scenario is credible and properly prepared, thus strengthening the bargaining position of the Greek government.

The conditions for a victory

The political sequence opened by the victory of Syriza is just beginning, and the outcome is totally uncertain at this point. The Greek government currently benefits from widespread popular support, and its strategy of “controlled disobedience,” as coined by Stathis Kouvelakis, seems well understood, which is a key asset. But the intra-European balance of power remains very unfavorable with low levels of popular mobilization outside Greece. And the possible electoral victories of the radical left in Spain or Ireland are too distant in the future to really make a difference given the fast pace at which events unfold.

Indeed, given the very tight repayment deadlines, whether Greece repays its debt and stays in the eurozone will likely be decided by the autumn. Assuming that the extension for four months of the assistance program leads to the expected cash disbursements—which is still far from certain at this stage—public finances will remain under heavy stress; a comeback of growth due to the end of austerity and the successes in the fight against tax fraud, however, could make it possible to make the large repayments to the ECB this summer. On the other hand, if the agreement outlined at the Eurogroup were to ultimately fail, a default would become unavoidable, probably resulting in an exit from the euro. The political balance in Greece and Europe will of course be crucial in deciding the final outcome, but one should however not overlook the institutional logics that can trigger unintended chains of events (that is, an “accidental” exit from the euro, also known as a grexident).

Ultimately, the challenge for Syriza is not to decide between a unilateral exit from the euro or a stay in the eurozone at all costs. A victory is possible outside and within the euro area, and the way forward will reveal itself as events unfolds. Beyond the necessary technical preparation of the different scenarios, the success of Syriza will depend primarily on its ability to manage the dialectical tension between confrontation with the European institutions and conservation of a broad popular basis.

[1]About € 15 billions in short-term commercial paper also have to be repaid, but it is reasonable to assume that such securities will immediately refinanced (i.e. the Greek government will issue new short-term loans an equivalent amount).
[2]In detail: € 142 billions from the European Financial Stability Facility (EFSF), € 53 billions of bilateral loans, € 29 billions of Greek bonds held by the ECB and the national central banks, € 75 billions of TARGET2 balance (the interbank payment system of the euro area).
[3]The idea would be to introduce a tax on tourist services provided to foreigners, at a rate approximately equal to the devaluation of the currency. In this way, the prices of touristic services in euros would be unchanged and would therefore remain as competitive as before the exit from the eurozone. And the proceeds of this new tax would be used to subsidize importations of basic goods, so that consumption of the working class is not penalized by the devaluation.