The implications of Syriza’s victory

The implications of Syriza’s victory

The implications of Syriza’s victory

Written by Christian Odendahl, Simon Tilford, 26 January 2015

Syriza’s victory creates much uncertainty for the eurozone. Given the party’s outspoken criticism of Greek economic and social policies over the last four years, and its sometimes confrontational statements vis-à-vis the eurozone, there are understandable fears that the election could presage a Greek exit from the single currency. This prompts several questions: is it in Greece’s interest to leave? What would be the consequences for the Greek economy and that of the eurozone? And is the rest of the eurozone willing to let Greece go? What follows is an attempt to answer these questions, and to predict what will happen, given what we currently know about the economics and politics of Greece and the eurozone.

Are there any benefits of Grexit for Greece?
Greece would regain autonomy over its monetary policy – the most effective tool for maintaining demand in an economy. Central banks influence the expectations of consumers and investors. Currently, firms in Greece expect low demand and deflation, and consumers low income growth. An independent Greek central bank, if it were able to control inflation, could raise those expectations, leading consumers and investors to spend and invest. The Bank of Greece would also be in a position to ensure that real interest rates (that is, interest rates after accounting for inflation) were low enough to stimulate investment and consumption.

What is more, the likely sharp fall in the value of the drachma against the euro would reverse the loss of trade competitiveness suffered by Greece since it adopted the single currency. Exports would no doubt be slow to recover given the collapse in investment in the country’s tradable sector in recent years. And many structural problems that hold investment back are yet to be tackled. But exports would eventually rise as investment recovered. One sector that would be sure to benefit would be the tourism industry.

After the inevitable default on its euro-denominated debt, the country’s debt burden would be much reduced, allowing the country to run a more expansionary fiscal policy. The Greek government would be able to borrow in its own currency as opposed to the euro, which would enable the Bank of Greece to act as a true lender of last resort to the government. This in turn would allow the government to stand behind the country’s banks. Finally, Greece would in all likelihood end up under an IMF programme, which would require the Greek authorities to persist with much-needed structural reforms in return for financial support.

The short-term would no doubt be chaotic and living standards would inevitably fall further as the price of imported goods rose. However, if the exit was well-managed, the economy could then recover relatively rapidly until the country is running at full potential (it is currently around 15 per cent of GDP below potential). Beyond that, the rate of growth would depend on the success of the Greek authorities in reducing structural impediments to growth. Finally, the threat to democratic stability and the legitimacy of national democratic institutions would recede, and with it the threat of political populism.

What would be the costs of Grexit for Greece?
A Greek exit from the eurozone would be a step into the economic and political unknown. An unmanaged exit would cause far-reaching financial and economic disruption. Huge capital flight from Greece would prompt runs on the country’s banks. This would force the newly independent Greek central bank to print large amounts of money to recapitalise the Greek banking sector, which might cause the drachma to collapse in value and lead to very high inflation. To prevent the gains from devaluation being whittled away by higher inflation, the Greek authorities would have to maintain the political momentum for structural reforms. Many Greek businesses with large foreign currency debts would either be forced into bankruptcy or need to be rescued by the Greek authorities. There would also be pressure from within the eurozone to expel Greece from the EU (legally, a country quitting the currency union must also forfeit EU membership), which would be highly destabilising for a fragile democracy such as Greece.

However, there is a decent chance that Grexit would be a more managed affair involving the pre-emptive imposition of capital controls; the provision of interim ECB support for the Greek banking sector; and the rapid redenomination of contracts – at least those written under Greek law – from euro into drachma. And although some might be tempted to make an example of Greece, the EU is likely to balk at pushing Greece out of the Union since this could involve Greece defaulting on nearly all of the debt it owed eurozone governments and institutions as well as damaging the credibility of the EU. However, even under this scenario, the newly-introduced drachma would weaken very significantly. The Greek authorities would have to work hard to establish institutional credibility and hence economic stability, and Greece’s relations with other eurozone governments would be seriously damaged. The short run downsides for Greece could therefore outweigh the potential (but uncertain) future upside.

What about contagion to the rest of the eurozone?
The short-term financial contagion following Grexit would be less acute than it would have been last time it seemed likely, in early 2012. The ECB is now committed to acting as lender of last resort to eurozone governments, eurozone banks are in better shape and there is a rescue fund (however unsatisfactory) in place. In the case of a Greek exit, investors may well test the ECB’s promise to act as lender of last resort, but it should have little problem responding in the required manner.

However, the longer-term risk of contagion could still be serious. A Greek exit from the euro would demonstrate that membership of the single currency is not necessarily forever. This could prompt an increase in borrowing costs for those countries considered at risk of exit, such as Italy. It has been hard for the ECB to start quantitative easing in the face of opposition from a group of members led by Germany, so it is far from certain that the central bank will be able to fulfil its promise to buy the bonds of struggling member-states under its Outright Monetary Transactions (OMT) programme. Moreover, the eurozone has failed to establish proper federal risk-sharing institutions or to write down debt to sustainable levels. In the absence of fiscal federalism, and with intra-eurozone adjustment in relative prices being thwarted by very low inflation in Germany, there are legitimate doubts over the ability of a number of eurozone countries to sustain membership.

Finally, the Greek economy might, after a shaky few months, recover relatively quickly following an exit from the eurozone, as both monetary and fiscal policy boosted demand. Such an economic surge would embolden political forces in other member-states like Italy who favour exit from the currency union. In order to stop this political contagion, the eurozone would have either to make a leap of integration, or throw most fiscal restraints over board and engage in aggressive monetary policy to engineer a proper recovery. Not only are both options hard to conceive in the current political climate. It is also unclear whether that would be enough to keep the eurozone together. The potential risks of Grexit are therefore large for the eurozone.

Does Germany really believe that Grexit would be manageable?
Despite these potentially large risks, both German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble reportedly believe that the eurozone is strong enough to cope with a Greek exit, as do a host of senior German MPs. But German politicians have the German voter foremost in mind when making public statements. Taking a hardline with Greece plays well. However, a very careful politician (and gifted tactician) like Merkel is highly unlikely to run the sizeable risk of contagion – especially since there are other ways to put pressure on a new Greek government.

Do Greeks want to leave the euro?
Greek popular support for the country’s euro membership remains strong. Despite an economic depression that is to a large extent a result of being part of the eurozone and the failure of the troika’s assistance programmes, three-quarters of Greeks say that Greece should stay inside the euro “at all costs”, according to a recent Greek poll. The reason is that there is little trust in domestic political institutions to manage an exit, and a return to a Greek currency, as well as the fear that exiting the euro might mean leaving the EU altogether. No government in Greece will have a mandate to take the country out of the euro. The threat to leave is therefore not a particularly credible one, despite some representatives of Syriza having toyed with the idea in the past.

Three key areas of negotiation
Neither Greece nor the rest of the eurozone has an interest in a Greek exit. As a result, negotiations between Greece and the rest of the eurozone will focus on addressing the following issues:

1. Debt relief

Syriza hopes to call a debt conference similar to the one held in London in 1953, in which Germany’s debts were cut in half. Syriza has made debt relief a priority, despite it no longer being the main obstacle to economic recovery in Greece: although the ratio of public debt to GDP stands at a very high 175 per cent of GDP, debt servicing costs are moderate because the interest rates on official loans from the EU are low. The EU and Germany are – for a combination of political and legal reasons – unwilling to grant a formal debt restructuring. But the middle ground of some further reductions in interest rates, and further maturity extensions could be the route to compromise.

 2. Austerity

Greece’s economic depression has in large part resulted from unprecedented fiscal retrenchment. Syriza has pledged to roll back some of those spending cuts; it wants to run a balanced budget rather than aim for the surpluses demanded by the troika; and it wants to spend €2 billion immediately to alleviate hardship among the poorest. But even these demands seem acceptable: current plans by the troika already entail a slight easing of fiscal policy and a €2 billion programme is modest in size (roughly 1 per cent of Greece’s GDP). The most controversial issue will be the pension system. Greece has already made significant cuts to pension entitlements, but further adjustments will be required because of the depth of the economic crisis.

 3. Structural reforms

Some of the troika’s demands, like simpler collective dismissal regulation, could be dropped without harmful effects on the Greek economy. Similarly, judicial reform, the continued overhaul of public administration and tax collection as well as land rights issues could be agreed upon, as Syriza has fewer constituencies affected by those reforms than the current government parties. The overhaul of the public sector would be much more problematic, as Syriza’s supporters are in part disgruntled public employees. The effect of raising the minimum wage, as Syriza plans, is controversial. But given the track record of past governments on structural reforms, even here a compromise with the troika is not out of sight.

The likely outcome
The political game between the troika and a Syriza government will be complex, and periods of brinkmanship are probable. There are some nuclear options for both sides: the withdrawal of liquidity for Greek banks, which the ECB has said it is considering; and the unilateral default on official loans by Greece. However, both sides have an interest in avoiding the nuclear scenario. The rest of the eurozone will have to appear tough in order not to set a precedent for populist parties elsewhere, but it has little interest in precipitating a collapse of Greece’s banking sector. For its part, Syriza would have little choice but to try a find agreement with the troika. It will face a €6-12 billion funding gap in 2015. Even funding for the first quarter of the year is uncertain without official funds, which are on hold until the troika’s final programme review of the second assistance programme is concluded.

The Syriza victory is unlikely to lead to a Greek exit from the euro, at least for the time being. European policy-makers and Greeks alike might regret Greece’s entry into the common currency in 2001. But divorce would be costly for both sides, and eurozone policy-makers now have too much experience to allow it to happen by mistake. However, this does not mean that the current situation is without risk. The middle ground between the Greek and eurozone positions is small and there is a possibility that the eurozone will not offer enough to satisfy Syriza. This would open the way for political instability in Greece, the outcome of which is hard to predict. Even if the two sides can reach agreement, they could find themselves back at the negotiating table in the near future if the economic and social situation in Greece does not improve.

Christian Odendahl is chief economist and Simon Tilford is deputy director at the Centre for European Reform.

This insight is based on a previous article by Christian Odendahl and Simon Tilford titled: ‘Greece will remain in the euro for now’. Read it here.

US, Japan offer lessons as Eurozone launches huge stimulus

US, Japan Offer Lessons as Eurozone Launches Huge Stimulus spotlight image

US, Japan offer lessons as Eurozone launches huge stimulus

By Christian Odendahl, 23 January 2015
From Voice of America

Link to press quote(s):

Breakfast on 'Britain and Europe'

Breakfast on 'Britain and Europe'

Breakfast on 'Britain and Europe'

25 February 2015

With the Rt Hon Douglas Alexander MP, shadow foreign secretary

Location info


Event Gallery

Genetically modified crops: Time to move on from theological dispute

Genetically modified crops: Time to move on from theological dispute

Genetically modified crops: Time to move on from theological dispute

Written by Stephen Tindale, 30 January 2015

One month after taking office, the Juncker Commission reached an agreement with the European Council and the European Parliament on an issue which had complicated life for both Barroso Commissions: genetically modified (GM) crops. Under this agreement, the Commission will continue to have the regulatory role of deciding, on scientific advice, whether a GM crop is safe to be grown anywhere in the EU. National governments will then be allowed to choose, on non-scientific grounds, whether to allow that crop in their country. This is a scientifically sound and politically pragmatic agreement, which should now be implemented without further argument.

MEPs voted overwhelmingly to accept this agreement on January 12th. Donald Tusk, the president of the European Council, had opposed GM crops when Polish prime minister, but must now cast his own views aside and encourage the Council of Ministers to respect the agreement. It should not waste more time on a theological dispute about genetic modification: arguments about GM crops have been clogging up European institutions for the last 15 years.

GM technology should not be supported or opposed per se. There are good GM crops and bad GM crops, just as there are good chemicals and bad chemicals. New agricultural technology is necessary. As the world’s climate warms, there will be changes in rainfall patterns and more droughts. With the global population expected increase to over 10 billion by 2100, more food will be needed. Genetic modification can make crops more drought-resistant. It can also make crops pest-resistant. So the technology can reduce the need for pesticides, protects wildlife and reduces the contribution of agriculture to greenhouse gas emissions by cutting the use of chemicals. GM can also increase crop yield per hectare, making it easier to feed a growing population without cutting down the remaining forests. And GM can be used to breed plants which are more nutritious, thus reducing disease.

On the downside, GM can also produce crops which are able to grow with more pesticide being sprayed on them without being damaged. This trait is less desirable than pest resistance because it might lead to greater use of pesticide: farmers would not need to worry about the chemicals damaging the crops. Increased pesticide use is of benefit to the agrochemical industry but not necessarily to wider society, and certainly not to wildlife. GM crops should be treated as a series of proposed technological changes, to be assessed and regulated on a case-by-case basis.

An example of a bad GM technology was the 1990s development by Monsanto, and other companies including AstraZeneca and Novartis, of seeds with ‘terminator technology’ inserted into their genes. Instead of producing new seeds each year, the crops were sterile, so that farmers would have to buy new seed. This would have damaged farmers in developing countries, and outweighed the benefits of higher yields. And a lack of genuine competition in the seed market could have meant that non-sterile seeds were not available to some farmers. Following extensive campaigning by green groups in the US and Europe, Monsanto announced in 1999 that it would not commercialise any crop with terminator technology.

An example of a good GM technology is ‘Golden Rice’ – rice which provides those who eat it with additional vitamin A. Vitamin A deficiency increases the risk of disease, resulting in up to 2 million deaths a year. It also damages eyesight, causing half a million children a year to go blind every year. The development of Golden Rice has been funded by the Rockefeller Foundation for the last two decades.

A number of patented technologies have been used in developing Golden Rice, but the lead company Syngenta negotiated with other involved firms (including Bayer, Monsanto and Zeneca Mogen), to allow plant breeding institutions in developing countries to use Golden Rice free of charge.

GM crops have been widely grown in many countries around the world for years, but in Europe only five member-states have any commercial GM agriculture. Spain has the most: about a fifth of its maize is GM. GM crops are also grown in the Czech Republic, Slovakia, Portugal and Romania. Nine countries – Austria, Bulgaria, France, Greece, Germany, Hungary, Italy, Luxembourg and Poland – ban GM crops. The other member-states do not have national policies preventing GM agriculture, but there are no GM crops grown, mainly because of public opposition. The British government would like to have GM crops grown commercially in the UK, but public opinion has so far won the argument against them.

National bans are illegal under European law. At the height of the GM controversy, when public opposition to the technology made the planting of any GM crops in Europe seem unlikely, member-states agreed to a directive on the release of GM material into the environment (in 2001) and a regulation on GM food (in 2003). These give regulatory control over GM crops to the Commission, which must base its decisions on the scientific advice of a separate, non-political agency, the European Food Safety Authority (EFSA). A national government is allowed to operate a temporary moratorium if it believes that the EFSA has overlooked some relevant scientific information. This government must then submit its evidence to the EFSA. Several governments have done this, but each time the EFSA has rejected the appeal. The member-state is then supposed to lift the moratorium. None has done so. The Commission has tried to put pressure on national governments – notably France, Germany and Poland – to permit planting, but without much success. In November 2012, after the Polish senate had lifted a ban on GM cultivation (at the behest of the Commission), Prime Minister Tusk said that he would reverse this decision.

In 2010 the Commission proposed a sensible compromise: it would remain responsible for deciding whether particular GM crops were safe, based on scientific advice. But member-states would then be allowed to operate national bans on non-scientific, political or ethical grounds. The Council did not agree to this: a majority of governments supported the proposal but a minority of anti-GM countries blocked it, even though it would have made their bans legal, because they wanted to achieve a Europe-wide end to all GM planting. In his statement to MEPs at his confirmation hearing in July 2014, Jean-Claude Juncker said that the political views of elected governments on GM should have the same weight as scientific advice in regulatory decision-making. Then on December 3rd, the Commission reached agreement with the Parliament and the Council to follow the approach which the Commission had proposed in 2010. This will lead to some countries, such as the UK, planting GM crops commercially for the first time, while Germany, France, Poland and other anti-GM countries will be allowed to retain their bans.

Have GMOs been proven to be safe? No. That is not how science works; nothing is ever definitively settled and more discoveries are always possible. Is there enough evidence that GMOs are safe to permit their release into the environment? Yes – if the benefits of the crops are sufficient to justify the inevitable risk that accompanies the release of new organisms into the environment.

The European Academies Science Advisory Council (EASAC) published a wide-ranging assessment of genetic modification in 2013. This states that: “There is no validated evidence that GM crops have greater adverse impact on health and the environment than any other technology used in plant breeding.” GM opponents argue that the risk of releasing new forms of life is so great that it should always be avoided, and often invoke “the precautionary principle”. However, the EU’s definition of this states that scientific evaluations of proposed new technologies should include both “a risk evaluation and an evaluation of the potential consequences of inaction”. The EASAC report says that: “There is compelling evidence that GM crops can contribute to sustainable development goals with benefits to farmers, consumers, the environment and the economy.” So the risk of action is small; the risk of inaction is large.

December’s agreement gives the EU a sensible case-by-case approach to GM regulation. This balances science and politics, as well as the single market and concerns over national sovereignty. A single market in agricultural goods requires that one member-state does not exclude produce from another country because it contains GM. Member-states have harmonised standards for GM produce since 2003. So Germany or France cannot ban maize from Spain because it is GM. They can now choose not to allow GM crops to be grown on their territory, and do not need scientific justification for this ban. As the Commission’s former chief scientific adviser, Professor Anne Glover, said at a CER event in July 2014, there may be economic or social reasons why a government chooses to ban GM crops. The fact that science says a crop is safe does not mean that countries should be forced to grow it.

Now it is up to national governments to agree to disagree on GM crops. The British, Czech, Spanish and Portuguese governments should stop pressing for more countries to allow GM cultivation, and the Austrian, French and German governments should stop trying to prevent any cultivation anywhere in Europe.

For its part, the EU needs to move on from a narrow focus on GM crops, and address wider issues of how to make agriculture more efficient and sustainable, as well as better able to withstand climate change and feed a growing global population.

Stephen Tindale is a research fellow at the Centre for European Reform. He spent six years as executive director of Greenpeace UK, which opposes GM crops. However, he has always thought that GM technology should be assessed case-by-case. He minimised campaigning on GM – never authorising direct actions against GM during his time in charge – and told Greenpeace’s campaigners to focus instead on how to make agriculture less environmentally-damaging.


Added on 13 Feb 2015 at 16:23 by adrian dubock

I was interested to read that the EU’s definition of the Precautionary Principle states “a risk evaluation and an evaluation of the potential consequence of inaction” should be included. It’s a pity that ‘RISK’ has dominated the interpretation, and benefit has so long been ignored. And not only at EC level. The UN is most culpable (see and individual countries also seem immorally capable of ignoring their own data when it doesn’t agree with their prejudices: Italy for example ( ).
The new European Parliament’s decision to allow the cultivation of EFSA approved crops to subsequently depend on national EC government’s decisions to allow cultivation is a good one. As a scientist, for politicians to allow political views to have equal merit in debate to scientific facts is depressing. Activist – political – organisations, having had their influence recognised, in the interests of democracy should now let EFSA get on with its scientific work without intimidation.
It is a concern of scientists that so few political leaders have scientific training. Mr Juncker’s should reinstate a Scientific Advisor position – so that he also gets both political and science input to policy discussion.
Currently the whole of the European animal feed industry depends on imported soya and maize mail derived from gm-crops imported from north and south America. It will be interesting to watch as activist groups applaud the savings of greenhouses gasses as these millions of tonnes of gm-animal feed are transported to Italy, France, Germany and Austria from, for example Spain and UK rather than the Americas.
Given that as, stated by Mr Tindale: “A single market in agricultural goods requires that one member-state does not exclude produce from another country because it contains GM.” It will be even more interesting to see the reactions of farmers in those currently anti-gmo countries forced to buy from eg UK and Spain (rather than growing themselves) for feeding to their livestock.

Added on 02 Feb 2015 at 11:11 by adrian dubock

Congratulations Mr Tindale, on an excellent analysis of what has become a tangled confusion and one of the worst examples of European federalism. What a pity that the negativity generated by 'European attitudes' towards gmo-crops has done so much damage to development and sustainable agriculture in countries which are influenced by European attitudes.
There are a few incorrect assumptions in the piece, which for the record, it is worth correcting.
Firstly, modern pesticides are safe and beneficial to humanity. Agriculture - all types - disturbs the environment in many detrimental ways. Intensive agriculture produces more food on less land sustainably, and as such protects wild lands and allows allows food production by a smaller part of the human population. Urban migration is a global phenomenon, and fewer and fewer people want to, or are able to, be employed in it. All the rest of the 7 billion of us depend for our food on the few farmers. Without the high productivity of today’s farmers compared to the ancients, mankind would not have been able to develop all the other aspects of culture and all the other occupations.
Secondly, "terminator technology" was never used commercially, it wasn't even considered for crop development pipelines by Zeneca or Novartis. The technology was developed by the US Government’s Department of Agriculture with the idea it may be useful to prevent gene-flow from genetically modified crops as a reaction to concern about this possibility from activist organisations, including Greenpeace. As an aside: who complains about seedless grapes, watermelons, and bananas. Or about hybrid maize? The activists seems to have been selectively ‘confused’.
Thirdly, with respect to Golden Rice: the technology was created as the first biofortified crop by public sector teams lead by two German Professors: Ingo Potrykus and Peter Beyer. They always wanted to – and did in 2001 - donate the technology to benefit the resource poor in developing countries, recognising that vitamin A deficiency causes preventable deaths. Syngenta acquired commercial rights to use the technology from the inventors, in return for providing support to the inventors for their humanitarian vision. In another example of the paradox of the activist opposition, this company support to a public sector problem was mostly needed directly as a result of the anti-gmo hysteria being proselytised by the activists.

Terrorisme : l'urgence européenne

Terrorisme : l'urgence européenne

Terrorisme : l'urgence européennevideo icon

France Culture
By Camino Mortera-Martinez, 17 January 2015
From France Culture

When you join the EU you make a deal – Switzerland needs to remember that

When you join the EU you make a deal – Switzerland needs to remember that

When you join the EU you make a deal – Switzerland needs to remember that

Written by John Springford, 19 January 2015
From The Guardian

La Unión Europea intenta blindarse contra el yihadismo

La Unión Europea intenta blindarse contra el yihadismo spotlight image

La Unión Europea intenta blindarse contra el yihadismo

By Camino Mortera-Martinez, 19 January 2015
From El Pais

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