Greece debt crisis: While Europe has avoided Grexit, the Greek economy remains in intensive care

The country faces a highly uncertain economic and political outlook

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The Independent Online

In a remarkable turn of events, Greece has reached a deal with Eurozone leaders on a new financial package, its third such bailout.  The deal is extraordinary in several respects, not least because Greek Prime Minister Alexis Tsipras has signed up to an agreement that is, in numerous respects, more stringent to that which both he, and the Greek populace at large in last week’s referendum, had previously roundly rejected.

The Greek government faces a turbulent political period ahead having compromised to such an extent with its creditors.  Several previous ‘red-lines’, including significant pension reform, have now been crossed that were previously declared sacrosanct by Syriza, and it now needs to get the legislative package through the Greek Parliament by Wednesday.

There have already been significant recent tensions within Syriza, the first radical left party to win power in the EU in years, which was elected on an anti-austerity mandate.  The party comprises a broad spectrum of political activists which includes socialists and communists, anti-fascists, and anti-globalisation campaigners, and this loose grouping only came together in 2012 as a single political entity, rather than an alliance of multiple different groups.

These intra-Syriza disagreements were highlighted, very publicly, in the Greek Parliament on Friday.  Although the Greek government won support of 251 out of 300 MPs for the proposals it took to Brussels this weekend, 2 Syriza MPs voted ‘no’, 8 abstained and 7 were absent.

Amongst the Syriza MPs not supporting the government were energy minister Panagiotis Lafazanis and deputy labour minister Dimitris Stratoulis, plus speaker of parliament Zoe Constantopoulou, all of whom abstained.  This points to the strong possibility that Tsipras may very need to soon reshuffle the cabinet and wider ministerial ranks. 

More broadly, following today’s agreement, there is potential for defections from the Syriza MP ranks and even the possibility of a party split.  This would be immensely dangerous for a party which already relies on a coalition partner (the conservative Independent Greeks) for a parliamentary majority.

Many in the Syriza ranks have been taken aback by the speed and scale of the government’s volte face with creditors.  What makes this even more explicable for some is that the change of heart by Tsipras came only days after Greece voted so decisively ‘no’ by a 61-39 majority on the package of measures proposed by its creditors last month which, in numerous respects, is less stringent than the one agreed Monday.

So at a time when the need for political stability is paramount to promote economic recovery, government infighting may prevent this happening.  Indeed, given the scale of the challenge now facing the country, it is possible that the government may collapse and/ or ultimately be forced to call a second general election this year.

This is problematic given the growing signs of financial turmoil and the fact that the economy may well be in deep recession again.  The imposition of capital controls last month, which may need to remain in place for some significant time, is placing new pressures on the financial system and it is still not clear when banks (which have been closed since Monday 29 June) will reopen, despite the new deal.

Moreover, Greece’s financial reputation in international markets has also been heavily chequered by its default on the 1.6 billion euro deposit that was due to the IMF.  In so doing, it became the first developed country ever to fall into arrears to the IMF or any indeed any other Bretton Woods institution.

And the money due to the IMF at the end of June marks just one of many debt deadlines for Greece in coming months.  The next big repayment on the horizon is on July 20 to the ECB and, while it now appears this will be honoured, this cannot completely be taken for granted in light of the brinksmanship of recent weeks.

While Europe has avoided grexit, in the immediate term at least, the Greek economy remains in intensive care.  Unless business confidence and recovery can be fostered in coming months, the country faces a continued highly uncertain economic and political outlook, even if the government secures parliamentary approval this week for the new bailout package.