Bloomberg — Greek Prime Minister Alexis Tsipras has promised voters he’ll reject even one euro cent more of budget austerity than is needed under the country’s bailout. Greece’s international creditors say the program’s requirements may include 3.5 billion euros in extra fiscal tightening he hadn’t bargained for.
The demand by the euro area and the International Monetary Fund is a potential bombshell for Tsipras, raising the threat of renewed instability in Greece.
Tsipras rode to power in January 2015 railing against austerity and nearly steered Greece out of the euro before flip-flopping last summer to secure the nation’s third bailout in six years. Since then the Greek economy has slipped back into recession, unemployment has stayed stubbornly high at around 25 percent and public support for the euro has weakened.
The prime minister’s current dilemma stems from a disagreement between the euro area and the IMF. While the European creditors say the government in Athens has committed to enough austerity to reach the targeted budget surplus before interest payments of 3.5 percent of gross domestic product in 2018, the IMF projects current Greek measures will produce an excess of just 1.5 percent.
So Tsipras and Finance Minister Euclid Tsakalotos face the delicate task of drawing up measures that can satisfy the creditors without breaking apart their coalition with the nationalist Independent Greeks. That balancing act would be a challenge for any Greek government, let alone one with an anti-austerity base, a deep dislike of the Washington-based IMF and a three-seat majority in parliament.
Here are three scenarios that could play out over the coming days and weeks:
Option 1: The Bitter Pill
It wouldn’t be the first time that Tsipras capitulates. Facing the risk of a banking-system collapse and Greece’s exit from the euro area last July, he abandoned his campaign vow to roll back austerity by accepting creditors’ demands in exchange for a new program of aid.
Tsipras may also be able to argue that, because the extra austerity measures would be enacted only if Greece misses its budget targets, this part of the package is harmless. And any agreement with creditors would be struck by Tsakalotos, the reputed leader of Tsipras’s internal opposition, limiting the scope for dissent.
Ruling-party lawmakers faced with the prospect of an election fight to hold onto their jobs may well be tempted to bite the austerity bullet again, banking on a boost in economic confidence from a deal before they have to face voters again. The next election isn’t due until 2019.
Market reaction to the outline deal that Tsipras has been offered by creditors is so far sanguine, signaling that investors regard this as the likeliest scenario.
Option 2: Snap Elections
Failure to reach an agreement could force Tsipras to dissolve parliament and let voters decide. That’s a card he played last year when his backbenchers revolted against the decision to accept creditor demands and stripped him of his majority.
Tsipras emerged strengthened from that tussle while the hard-left faction of Syriza that abandoned him failed to win any seats in September’s snap vote. He may struggle to repeat that trick.
Tsipras found support from pro-European opposition parties to get the tough measures attached to the aid program through parliament. But even if the mainstream opposition forces do endorse a deal to unlock more aid payouts, they’ve said they won’t support a Tsipras-led government.
Opinion polls, which have often proved wrong in Greece, show that the main opposition conservative New Democracy has regained the lead after more than two years.
A New Democracy victory would probably lead to a coalition with moderate parties committed to keeping Greece in the euro or produce a national unity government. The question in that scenario, as in 2012, is whether it would be dangerously late to get Greece’s bailout back on track again after the political drift of election campaigning and the negotiations to form a coalition.
A hung parliament leading to prolonged instability, or a Tsipras victory on an anti-more-austerity ticket, are also possibilities. Either of those outcomes could put Greece on the path toward default in July and expulsion from the euro some time afterward.
Option 3: Referendum
One step shy of the nuclear tactic of a snap election would be another referendum.
Tsipras could claim that the creditors are demanding more than was agreed under the bailout and he needs a new mandate to implement the measures, much as he argued before last July’s shock plebiscite. A poll by Kapa Research published earlier this month in To Vima newspaper suggested that Greeks would vote against more austerity, as they did last year, putting the country’s place in the currency bloc in doubt again.
Greece’s pro-European opposition parties could ask voters to abstain in an effort to discredit Tsipras’s referendum while reducing the risk of a negative vote. If turnout ended up being low, Tsipras’s position could become untenable. Still, a referendum would give him more wiggle room than an election.
