On Dec. 8, two key announcements for the future of Greece were made. At a meeting in Brussels, eurozone finance ministers decided to grant Greece a two-month "technical extension" of its bailout program, which was originally scheduled to end this month. This decision would pave the way for the disbursement of the outstanding 1.8 billion euros ($2.24 billion) under the current program. A few hours later, the Greek government announced that the parliament would vote on a new Greek president on Dec. 17, two months ahead of schedule. In the likely case that no agreement is reached in the first vote, additional votes will take place on Dec. 23 and 29. On Dec. 9, Samaras named Stavros Dimas, a former European commissioner and former foreign minister, as the government's presidential candidate.
The decision by the eurozone finance ministers and the announcement of early presidential elections are linked, as the Greek government wanted to remain under external financial tutelage while dealing with the political situation at home. However, markets are still worried about Greece's political instability. On Dec. 9, the Athens Stock Exchange plunged by 12.78 percent, the biggest drop since 1987.
Tough Negotiations on Multiple Fronts
Athens wants to end its bailout in early 2015 and replace it with a conditional credit line. From the government's point of view, this serves two main goals. First, it would allow Greece to borrow from financial markets at relatively low interest rates. Athens fears that without the backing of a credit line, it would be hard for Greece to return to debt markets (Greece's bond yields have been going up recently because of political uncertainty). Second, the credit line would come with softer conditions than the IMF-EU bailout. These conditions are quite important because most Greek voters are tired of austerity measures, and Athens wants to reduce the influence of external players on domestic policies. In the long run, the Greek government would also like to receive longer maturities and lower interest rates for its debt.
However, the Europeans fear that a credit line with minimum conditions would weaken Athens' desire for economic reform at a time when the government is about to see some timid economic growth. On Dec. 7, the Greek parliament approved a budget for 2015 that includes new tax hikes and government spending cuts. The budget prompted protests from unions and the opposition and criticism from Greece's lenders. The troika — the IMF, the European Union and the European Central Bank — believes that Athens' forecasts of growth (2.9 percent) and deficit (0.2 percent) for next year are too optimistic and that additional reforms are needed. The troika also estimates that Greece will have a fiscal gap of some 2.5 billion euros next year. The decision to grant Greece an extension of its bailout is meant to give the Greek government and its lenders a few extra weeks to negotiate Athens' plans for economic reform and the terms of the new credit line.
Athens' negotiations in Brussels are closely linked to events at home. The Greek government is about to face a crucial vote in parliament to replace President Karolos Papoulias, whose term expires in March. To elect a new president, 180 votes are required, but the ruling coalition — comprising the center-right New Democracy and the center-left Panhellenic Socialist Movement parties — only has 155 seats, which means that it needs support from other lawmakers. While the role of the president is largely ceremonial, Greek law stipulates that if lawmakers fail to appoint a replacement for Papoulias the parliament should be dissolved and early elections called. Opinion polls show that early elections could end in a victory by the left-wing Syriza, a party that rejects austerity measures and proposes to renegotiate Greece's debt.
This situation puts the European Union in a dilemma. Most European governments would rather deal with the current Greek government instead of pushing Greece to early elections that could empower a party that is questioning the full repayment of Greece's public debt. Syriza leader Alexis Tsipras has said that his party intends to remain in the eurozone, honor Greece's private debt and keep a balanced budget. However, Syriza also wants Greece's international creditors to accept a write-down of Greek debt.
Greece's massive debt restructuring of 2012 changed the profile of Greek debt, which is now mostly in the hands of the European Financial Stability Facility, the European Central Bank and national governments. This means that a new haircut of Greece's debt would particularly hurt the European Central Bank and EU members — a good reason for Brussels to help Samaras' government to keep Syriza at bay for as long as possible. Although most eurozone members are worried about Greece relaxing its reforms program in 2015, they will continue to help Samaras' government out of fear that it could be replaced by a more confrontational administration. In the case of early elections, New Democracy will try to send voters the message that it could get a better deal from Greece's lenders than Syriza can.
Debt Will Remain Problematic
Regardless of whether Greece manages to avoid early elections and to get a precautionary credit line, debt will remain a key problem for the Mediterranean nation. According to the IMF, Greece will have to permanently keep a primary surplus above 4 percent of gross domestic product while growing at around 3 percent every year to take its debt from 174 percent of GDP in 2014 to about 128 percent in 2020. But Athens is quite far from this situation: This year, the IMF calculated Greece's primary surplus to be at around 1.5 percent, and the Greek economy was forecast to grow by 0.6 percent.
Although this is certainly an improvement in Greece's macroeconomic situation, it came at a high political and social cost. The rise of Syriza and, to a lesser extent, the far-right Golden Dawn party, highlights the extent to which a growing number of Greek voters are demanding a change in direction. Syriza's rise has already led to the end of Greece's traditional two-party system, where the center-left and the center-right used to take turns in power. In 2012, it took two parliamentary elections to keep the left-wing party from accessing power.
As a result, any Greek government will have to deal with the question of whether to follow the troika's recommendations (and permanently deal with social unrest and political instability), or to push for a softer fiscal policy (and create frictions with the European Union and uncertainty in financial markets). Even if the Greek government finds the extra seats it needs to appoint a president and avoids early elections in 2015, the prospect of a renegotiation of Greek debt will not disappear and will continue creating uncertainty across the eurozone.