Are the numbers starting to add up for SYRIZA?

Illustration by Manos Symeonakis for Cartoon Movement

Trying to predict how Greeks will vote on June 17 in the midst of the turmoil created by the country’s grueling economic crisis and the disorientating political transition is a thankless task, but the latest Public Issue poll for Kathimerini indicates we might get a clear result.

More so than at any other point over the last few weeks, Public Issue suggests that SYRIZA has built a commanding — although not decisive or unassailable — lead over New Democracy. The survey shows a rise of 1.5 percent for the leftists since last week, so they now stand at 31.5 percent. New Democracy suffered a marginal decline and sits at 25.5 percent.

They are followed by a struggling PASOK on 13.5 percent, a resurgent Democratic Left (DIMAR) on 7.5 percent, a static Communist Party (KKE) on 5.5 percent, the declining Independent Greeks on 5.5 percent and a shrinking Chrysi Avgi (Golden Dawn) on 4.5 percent. The liberal alliance of Dimiourgia Xana (Recreate Greece) and Drasi falls short of entering Parliament with 2.5 percent.

In terms of parliamentary seats, this translates into 134 for SYRIZA, 68 for New Democracy, 36 for PASOK, 20 for DIMAR, 15 for KKE, 15 for Independent Greeks and 12 for Chrysi Avgi. While SYRIZA could not form a government itself with these numbers, it would only need the support of Democratic Left to have a majority.

At this point, two caveats must be added: Firstly, the poll was conducted before SYRIZA leader Alexis Tsipras presented his party’s economic program on Friday and, secondly, the May 6 elections showed there can be plenty of movement in the last two weeks of the campaign.

SYRIZA’s economic program has the potential to make or break the leftists. If it is deemed incoherent and full of holes that the other parties can expose, SYRIZA’s aspirations of power could be short-lived. If, on the other hand, it is seen as a coherent agenda that the party can unite behind in a disciplined manner in the final stretch of the campaign, it may be enough to get the radical coalition over the finishing line. SYRIZA’s surge before the May 6 polls came in the last two to three weeks of the campaign, taking most commentators, pollsters and analysts by surprise. It cannot be ruled out that a similar shift will be seen over the next two weeks. Since this is such a close-run contest, it will not take much to swing the final result in favor of SYRIZA or New Democracy.

However, there are certain signs that SYRIZA has managed to build on the momentum it gained on May 6, when it won almost 17 percent of the vote — more than three times the share of the ballot it received in 2009.

The fear for SYRIZA was that having being thrust into the spotlight as a result of its showing on May 6, its weaknesses would be exposed and the party would be left deflated on June 17. The first week or two after the May 6 elections proved a tricky period for the leftists, whose jumbled positions on economic policy and the EU-IMF memorandum undermined the party’s credibility. It also exposed the fact that SYRIZA is a coalition of radical and more moderate forces and that its polyphony can be a serious weakness as well as strength.

Its opponents played on these shortcomings and fears that a confused, immature SYRIZA-led government would jeopardize Greece’s euro membership. Polls indicated an initial rise in support for New Democracy but the Public Issue survey suggests this has tapered off, at least for now.

The danger for SYRIZA was that if it was deemed to lack credibility, some of the support it gained on May 6 would drift back to PASOK or even migrate to Democratic Left, which maintains a more measured opposition to the EU-IMF bailout than the radical leftists. But neither of these things happened. For all the fluctuations polls showed in the support for SYRIZA and ND, PASOK has remained anchored to its feeble showing on May 6. The Socialists have hardly moved from around 13 percent and seem unable to convince their former supporters to return to the fold. In contrast, Democratic Left shows a modest rise, but this has not come at the expense of SYRIZA. There has been a drastic fall in the number of people intending to vote for parties that won’t get into Parliament. If SYRIZA and Democratic Left are drawing support from this pool and not from each other, then Tsipras’s party doesn’t face a strong threat from the left side of the political spectrum.

In fact, the Public Issue poll indicates that SYRIZA is fishing support from an even larger tank. Over the last few months, a growing proportion of Greeks has positioned itself on the left wing of Greek politics. According to the latest survey, half of those questioned said they identified with the left. This was up from 39 percent just over a month earlier. Those identifying with the right, however, are at 28 percent, which has remained virtually unchanged for the last six weeks.

This presents a serious problem for New Democracy. These numbers suggest its potential appeal has a much lower ceiling than SYRIZA and that it has almost reached it. The conservatives have tried to pull out all the stops to build on the slim lead of 2 percent they had over the leftists on May 6. This included welcoming back Dora Bakoyannis, who suspended the operation of her Democratic Alliance party, and several members of the Popular Orthodox Rally (LAOS) and Independent Greeks, all of which had been a drain on ND’s support. However, now that’s been done, ND leader Antonis Samaras has nowhere else to turn to generate support. He’s brought in the reinforcements but still seems outnumbered by Tsipras’s amassing troops.

The last vestige of hope for Samaras has been to polarize the campaign, to turn it into an all-out battle between the responsible conservatives who would keep Greece on an even keel and in the euro and the reckless leftists who dream impossible schemes that would ensure the return of the drachma and deep misery. So far, the euro-vs-drachma dilemma has had only limited appeal and time is running out for Samaras to state his case convincingly.

The presentation of his party’s economic program on Thursday lacked the pomp and circumstance of previous addresses at Zappeio Hall but, more crucially, seemed to carry little weight. Media interest was scant and the ideas presented were tired. It had the air of an inconsequential conference, where everyone was staring at the clock for the last speaker of the day to finish. Compare this with the heightened expectation for Tsipras’s address on Friday, and the SYRIZA leader seemed like the guy with all the momentum. Brighter and fresher, he even got his audience of their seats a couple of times. Maybe the body language and aura meant very little but one imagines the conservatives would have gladly swapped places with the leftists at this stage of the campaign.

One encouraging sign for the conservatives could be that almost twice as many Greeks think that ND will win the elections as those who believe SYRIZA will come first. The leftists want to break with the past but they have to conquer it first by making people believe a SYRIZA-led government is possible and viable. It may be the only thing left standing between them and what until recently was an election result nobody could have predicted.

Nick Malkoutzis


29 responses to “Are the numbers starting to add up for SYRIZA?

  1. Very clear analysis! Thank you! The first sentence of your last paragraph is something I’ve been wondering about for some time. I suspect that the fact that many people believe ND will win may actually work in Syriza’s favor, pushing undecided and unmotivated people to vote for Syriza rather than “let ND win.” I can tell you that my husband falls into the category of people who voted for an extraparliamentary party on May 6 but plans to vote for Syriza this time unless Tsipras does something particularly stupid between now and June 17. And this is someone who, at least on an ideological level, very strongly supports the small party for which he voted in May. I suspect that many in the “undecided” group are people like my husband – he would probably have to be considered officially undecided by a pollster, but he’s undecided between parties that don’t include ND. That could well be an important category of people in the election. Not much longer now….

    • solidarity greetings from Ireland

      • remember their scare tatics for a yes vote, 31 May Ireland. over 600,00 voted no. we need political solidarity unity is strenght. lets not forget the political arrogance of Michael Noonan. minister of Finance. comments at Bloomberg economic forum in Dublin 16 May, about imported feta cheese from Greece. after the vote on 31. Noonan was in America at Bindenburg group

  2. I will very much look forward to your analysis of the Economic Manifesto which SYRIZA presented today!

  3. Syriza is here to stay, whether in government or as the main opposition. Thanks to Frau Ridiculous that is. Because this is all her doing.

    Only an evil mind like Merkel could have devised such plan to fragment the Greek political system so that she can dominate it and then blame it on the Greeks if (as certainly) things don’t work out.

    BTW, I like the Tsipras picture you have as a Hugo Chavez kind of figure. This ought to give him a few more votes I am sure, based on the contrarian thinking of Greek voters. The more the Merkel propaganda portrays Tsipras as a radical the more power he seems to derive. So, keep it Berlin unsophisticated amateurs; the more you spew your Grexit nonsense the more power he gets. Tsipras will be the next Kaiser and his new seat of government will be Berlin itself.

    • Dean, I can follow your logic but try to follow mine as well.

      The greatest negotiating tool which a borrower (be that a corporation of a country) can bring to negotiations with creditors when in financial trouble is a turn-around plan. A plan which is so good that creditors can’t say no to it. The two establishment parties have now had over 2 years to work out such a plan, and I am not aware that there is one. SYRIZA has had less than a month and they now have a plan. Parts of it are silly, parts of it are good. But it is a plan and a starting point with creditors.

      PASOK, particularly Mr. Papandreou, have from the beginning left the impression like they are asking for help and are prepared to do anything to get it. That is always a road to disaster because one immediately loses the support of the people if the impression comes across that austerity is being imposed by creditors.

      ND, and particularly Mr. Samaras, hadn’t come up with anything other than the word “njet”. Only in recent months has there been a change of attitude and a flurry of new ideas, mostly silly.

      In Austria we once had Jörg Haider. He was from the Right what Tsipras is from the Left. Like Greece has (had?) ND and PASOK, Austria had ÖVP and SPÖ (Grand Coalition for most of the time since WWII with the respective consequences when 2 large parties think they own the country). They demonstrated incompetence and Haider picked up votes. At one point, he was the No. 1 with 33% (having started at 4%).

      Did Haider become No. 1 because he was so good? Because the EU declared Austria an outcast because of Haider? Not at all! He got to this point because the two establishment parties from which voters expected that they would do a decent job failed miserably; failed embarrassingly.

      So, that’s my take why Alexis Tsipras got to where he is now.

  4. I am not Greek and I do not have a good grasp of the details of how the Greek economy works, so feel free to ignore anything I say.

    As I understand the Syriza programme they are proposing to:

    Aid poorer households by
    a) cancel cuts in the minimum wage and benefits.
    b) cut VAT on food
    c) Writing off high level of personal debt

    Stimulate the economy by
    a) Boosting demand (see above)
    b) Boosting tourism by cutting VAT on tourism related services
    c) Facilitating investment by nationalising the banks and recapitalise them so they can begin lending again.
    d) Reverse privatization of key firms

    Stabilising government finances by
    a) Defaulting on interest payments
    b) Reducing tax evasion
    c) Increase taxation on high incomes.

    There are some nice ideas here but this is not a coherent anti-crisis programme.

    As things stand, Greece is an open economy and has no control over its currency. As a result Greek industry is uncompetitive. The country has a massive balance of payments deficit and capital flight.

    The crisis is a lot more than a lack of demand.

    Cancelling cuts in the minimum wage and benefits and giving relief to indebted household will help demand but this won’t help employment if the money is spent on imports. Worse, in the current situation raising wages may force some firms into bankruptcy, leading to higher unemployment.

    At the same time the state is running a fiscal deficit independently of interest payments. Even if the government denounce the Memorandum-Loan Agreement and defaulted on all its debts it would still have a shortfall of about one percent.

    As currently constituted, the Greek state lacks the machinery to levy taxes on those best able to pay them.

    A real anti-crisis programme would include measures to control the economy as a whole. This means either:
    a) Exiting the Euro
    b) Leaving the EU
    c) Both

    So far Syriza has refused to entertain such possibilities.

    • You are correct to say that the main problem of the Greek economy is lack of demand. The same applies (lack of demand) for the the rest of the eurozone.

      As to the 3 choices you offer at the end, please add another multiple choice “d. None of the above” and feel free to proceed in checking it as the correct answer.

  5. Klaus:

    I hear you, but only one of us is right (or at least closer to the truth).

    IMHO, Tsipras does not possess any new or spectacular skills which were unknown when his party commanded 5% of the vote. The fact that today he commands close to 25% (5 times multiplier) is all memoranda related.

    The message that the Greek electorate is trying to pass to their leaders is that any politician collaborating with Merkel will have to die a sudden death. Already two Greek parties have died: PASOK and LAOS.

    In essence today, there are only 2 contenders for the top job. Samaras and Tsipras. But coming in first is not the ideal position. As Game Theory has it, a close second is the best position.

    The reason for such is whoever is elected first will go down in flames, whichever way they deal with Merkel (either collaboratively or by resisting). Therefore, the last party standing will get the eventual job by default. Because everybody else would have been destroyed in dealing with the Merkel factor.

    So the skill here is to come in a close 2nd. Then push your opponent in front of Merkel to self-destruct. You then have to deal with Merkel yourself, but since there would be no other political alternatives then your degree of freedom would be truly exceptional.

    Since I support Samaras as the experienced guy, I actually want Tsipras to come in first this time so that he can get burned. But Tsipras already knows this. So, he will give Samaras the top spot.

    What happens next I will keep to myself. There is no reason to give free strategy lessons to Merkel because she is the enemy we must defeat.

  6. A couple of thoughts, in no particular order:
    — Public Issue ( does not clarify how it processed the percentage of ‘undecided votes’. Recalling that, according to an earlier poll by marc for ALPHA (, almost 40% of respondents made their decision on who to vote for within the fortnight that preceded the 6 May election, and 22% decided on election day, the variable of undecided votes could prove crucial on 17 June.
    — Apart from poll that you cite here, it’s worth noting that there are another 6 polls, all published in the last week, which, in contrast to Public Issue’s survey show that New Democracy has the lead in current voter preferences, by a small margin of roughly 2.5% on average. There’s no reason that I know of to suggest that any of the 7, in total, polls is more or less reliable than the rest, but it’s at the very least interesting to note the striking difference (a summary of all 7 polls here:
    — As it happens, having read closely the transcript of Tsipras’s speech (and watched him deliver it on the TV), I tweeted ‘On close reading, SYRIZA’s platform is full of holes: they seem set to botch the bailout issue, on which their excellent intentions depend.’ That’s several hours before I read your article, by the way.

    That – the intended handling of the bailout agreement – is more of a black hole, as I see it at any rate, that could swallow up the party’s chances to make a much needed positive difference, if elected: all the, indeed mostly excellent, from a social point of view, intentions of SYRIZA hinge on how it’ll handle the sources of the money without which Greece can’t repay its debts or cover its immediate needs. Like it or not, that money’s the fuel that can keep the country’s engine going at all, and no alternative source of citizen-friendly energy can replace it overnight. If SYRIZA botches that crucial issue, we can all forget about reforms, equality, stability. So, how will they actually handle this issue?

    Hidden towards the end of Tsipras’s speech, there’s SYRIZA’s intention to first annul the Memorandum and the respective laws, then renegotiate a ‘loan agreement’ under a different name. Is nomenclature really an issue? (Do I care whether it’s called ‘Memorandum’ or ‘Scrooge McDuck’?) Reading that speech, one would think that the Memorandum is distinct from the loan agreement, whereas, so far as I know, the Memorandum Of Economic And Financial Policies ( and the Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding ( are the agreements.

    Does SYRIZA mean to tear up the Memoranda to the Troika’s face amid much fanfare and public delirium (screams of rapture or terror, depending on the leanings of said public), and THEN ask the same Troika to sit down and renegotiate the terms of those very agreements, which will presumably be presented to (enforced on?) Greeks in a different guise?

    If so, what are the chances that Troika will be royally pissed off and not inclined to negotiate anything on Tsipras’s terms? If Tsipras announces (admits?) that he intends to renegotiate the content of the loan agreements anyway, because he can’t afford to chuck it away, what’s the point of tearing the package and courting hostility from the packagers instead of fostering their cooperation? Is there some ingenious strategy invisibly woven into what to all intents and purposes seems like scarily populist flamboyance (or being genuinely at a loss as to how to handle the Troika and the bailout agreements in a way that superficially pleases as many different types of voter as possible, i.e. those against the Memorandum and those who fear that tearing it up would precipitate a headlong default)?

    Your evaluation of this last question (in a future article?) would be most welcome.

    • Yet, the correct move will be to allow Syriza to come-in first so that it can self-destruct.

      Samaras then can be at the helm of a real government no later than 3 months afterwards.

  7. Greeks will find out exactly who their enemy is when they are on the soup lines with no EU to help them. Hint… he was a former communist. Any ideas?

  8. >There is no reason to give free strategy lessons to Merkel because she is the enemy we must defeat.<

    What a pitty for Mrs. Merkel! The following article by Felix Salmon gives some interesting insights on the mental state of Greece.

    His summary says

    "Looked at from the US, it’s easy to see Tsipras as playing a deeply tactical game: he’s advocating that Greece call Germany’s bluff, and thereby continue to get EU financing while reducing the amount of austerity that Greece has to impose on itself in return. But looking at this poll, I don’t see tactics: I think that Tsipras is simply reflecting very real Greek attitudes to Germany — attitudes which consider Germany to be not only fascist, but also deeply corrupt. If you think you’re owed money by such a country, you’re not going to be particularly willing to accept onerous bailout conditions in order to receive it.

    All of which says to me that Grexit is inevitable, sooner or later. These two countries have pretty much nothing in common, bar their current currency. And now the tensions caused by that common currency are surfacing in particularly ugly ways. Before things get much worse, it would surely be better for both of them if Greece decided to go its own way."

    • This is precisely the language that makes the Tsipras percentages go up. Go ahead, you are doing a fine job working for Tsipras for free.

      • Peter Delaw

        Do you disagree with Salmons rationale and with the quoted research? Or do you recommend to better not touch taboos as the outcome could be messy?

        According to the study provided by Salmon it looks like a clear majority of Greeks shows a deeply rooted distrust against Germany and believes it is fascist and corrupt to the core.

        Can those resentments be ignored by anyone looking for a workable solution?

      • Peter:

        If you think that Grexit is inevitable then make us to it. Show us how?

        If as you say the Greek sentiment is decidedly anti-German, then it’s Germany that needs to change her arbitrary austerity rules.

        Dreaming that you can force Greece out of the eurozone is laughable because it’s deep down naive.

        If this is the only argument left, in other words “do as I say or else” well then show us the “else”. By now the whole world knows that Hellenising the crisis is beyond a joke. Germany’s problem is not Greece, but Spain.

        The fact that such rudimentary truth is being understood by Tsipras, it’s not our problem(Greece’s problem). It’s Merkel’s problem because Merkel created the Tsipras phenomenon. So, deal with him. He is all yours.

  9. Having read through the Economic Manifesto presented by SYRIZA/Mr. Tsipras yesterday, I would strongly recommend that it be read carefully (and I say this as someone who would object to this Economic Manifesto). It is long on soundbites and short on specifics but some of the soundbites will become very popular among those Greeks who are going through pain and humiliation due to the crisis. Those who downplay that may live to regret it. I summarized my impressions below.

  10. This is meant as a blanket reply to all comments above. If you want to talk intelligently about the problem then we have to define it first. This excerpt below tells all you need to know about the euro crisis:

    “The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied.

    Since the euro crisis is currently exerting an overwhelming influence on the global economy I shall devote the rest of my talk to it. I must start with a warning: the discussion will take us beyond the confines of economic theory into politics and the dynamics of social change. But my conceptual framework based on the twin pillars of fallibility and reflexivity still applies. Reflexivity doesn’t always manifest itself in the form of bubbles. The reflexive interplay between imperfect markets and imperfect authorities goes on all the time while bubbles occur only infrequently. This is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the global economy. How could this happen? My answer is that there is a bubble involved, after all, but it is not a financial but a political one. It relates to the political evolution of the European Union and it has led me to the conclusion that the euro crisis threatens to destroy the European Union. Let me explain.

    I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

    The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

    Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

    The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

    The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

    But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

    It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

    The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is now(no?) sign of this happening.

    The European authorities had little understanding of what was happening. They were prepared to deal with fiscal problems but only Greece qualified as a fiscal crisis; the rest of Europe suffered from a banking crisis and a divergence in competitiveness which gave rise to a balance of payments crisis. The authorities did not even understand the nature of the problem, let alone see a solution. So they tried to buy time.

    Usually that works. Financial panics subside and the authorities realize a profit on their intervention. But not this time because the financial problems were reinforced by a process of political disintegration. While the European Union was being created, the leadership was in the forefront of further integration; but after the outbreak of the financial crisis the authorities became wedded to preserving the status quo. This has forced all those who consider the status quo unsustainable or intolerable into an anti-European posture. That is the political dynamic that makes the disintegration of the European Union just as self-reinforcing as its creation has been. That is the political bubble I was talking about.

    At the onset of the crisis a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown. But as the crisis progressed the financial system has been progressively reordered along national lines. This trend has gathered momentum in recent months. The Long Term Refinancing Operation (LTRO) undertaken by the European Central Bank enabled Spanish and Italian banks to engage in a very profitable and low risk arbitrage by buying the bonds of their own countries. And other investors have been actively divesting themselves of the sovereign debt of the periphery countries.

    If this continued for a few more years a break-up of the euro would become possible without a meltdown – the omelet could be unscrambled – but it would leave the central banks of the creditor countries with large claims against the central banks of the debtor countries which would be difficult to collect. This is due to an arcane problem in the euro clearing system called Target2. In contrast to the clearing system of the Federal Reserve, which is settled annually, Target2 accumulates the imbalances. This did not create a problem as long as the interbank system was functioning because the banks settled the imbalances themselves through the interbank market. But the interbank market has not functioned properly since 2007 and the banks relied increasingly on the Target system. And since the summer of 2011 there has been increasing capital flight from the weaker countries. So the imbalances grew exponentially. By the end of March this year the Bundesbank had claims of some 660 billion euros against the central banks of the periphery countries.

    The Bundesbank has become aware of the potential danger. It is now engaged in a campaign against the indefinite expansion of the money supply and it has started taking measures to limit the losses it would sustain in case of a breakup. This is creating a self-fulfilling prophecy. Once the Bundesbank starts guarding against a breakup everybody will have to do the same.

    This is already happening. Financial institutions are increasingly reordering their European exposure along national lines just in case the region splits apart. Banks give preference to shedding assets outside their national borders and risk managers try to match assets and liabilities within national borders rather than within the eurozone as a whole. The indirect effect of this asset-liability matching is to reinforce the deleveraging process and to reduce the availability of credit, particularly to the small and medium enterprises which are the main source of employment.

    So the crisis is getting ever deeper. Tensions in financial markets have risen to new highs as shown by the historic low yield on Bunds. Even more telling is the fact that the yield on British 10 year bonds has never been lower in its 300 year history while the risk premium on Spanish bonds is at a new high.

    The real economy of the eurozone is declining while Germany is still booming. This means that the divergence is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give.

    In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support.

    I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement. But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window.

    Correcting the mistakes and reversing the trend would require some extraordinary policy measures to bring conditions back closer to normal, and bring relief to the financial markets and the banking system. These measures must, however, conform to the existing treaties. The treaties could then be revised in a calmer atmosphere so that the current imbalances will not recur. It is difficult but not impossible to design some extraordinary measures that would meet these tough requirements. They would have to tackle simultaneously the banking problem and the problem of excessive government debt, because these problems are interlinked. Addressing one without the other, as in the past, will not work.

    Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

    That is where the blockage is. The authorities are working feverishly to come up with a set of proposals in time for the European summit at the end of this month. Based on the current newspaper reports the measures they will propose will cover all the bases I mentioned but they will offer only the minimum on which the various parties can agree while what is needed is a convincing commitment to reverse the trend. That means the measures will again offer some temporary relief but the trends will continue. But we are at an inflection point. After the expiration of the three months’ window the markets will continue to demand more but the authorities will not be able to meet their demands.

    It is impossible to predict the eventual outcome. As mentioned before, the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years’ time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency. But the trends are clearly non-linear and an earlier breakup is bound to be disorderly. It would almost certainly lead to a collapse of the Schengen Treaty, the common market, and the European Union itself. (It should be remembered that there is an exit mechanism for the European Union but not for the euro.) Unenforceable claims and unsettled grievances would leave Europe worse off than it was at the outset when the project of a united Europe was conceived.

    But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

    I believe most of us would find that objectionable but I have a great deal of sympathy with Germany in its present predicament. The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.”

    • Oh dear, Dean. An intelligent man like you doesn’t see through George Soros’ motives?!? You will be pleased to hear that a Greek told me today that he had it from absolutely reliable sources that Soros is financing SYRIZA. Now does that make your day?

      • Klaus:

        Could you please define a bit what you just said?

        Soros is funding Syriza to the tune of?

        The part I know of Soros’ organizations is that they support a number of Open Society initaitives mainly in the ex-eastern EU block and the Balkans.

        Why would Soros be supporting Syriza? Under what pretext or rationale? and what would he expect in return?

        I need some education on the subject so whatever you could provide, it would help.

      • Dean, I guess you didn’t realize that I was only teasing…

      • No, I didn’t. Sorry.

  11. Pingback: GREECE SOLIDARITY CAMPAIGN UPDATE 2 | Greece Solidarity Campaign

  12. Pingback: GREECE SOLIDARITY CAMPAIGN UPDATE 2 | Coalition of Resistance Against Cuts & Privatisation

  13. I am a citizen of Athens, Greece, and since the capital is always the place where all political-social etc tensions reach the highest peak, I would say that indeed SYRIZA (COalition of the RADical Left) has gained a lot of support from different spectra of Greek politics! It has gained a lot of Left Support, but adding even more to its dynamic is the influx of PASOK, ND voters who finally understood that the politicians who have been governing for the last 30 or so years, are just preachers of lies, and pursue their vested interests only, leaving people aside!
    As a Greek, I want to dispute all rumors regarding the situation here, according to which Greeks just don’t want to pay their debt etc .. No siree, we don’t want the middle-lower class to pay for it! We should first examine WHICH PROPORTION of it we MUST pay, and pay it then, by taxing the richer and relieving the poorer..
    We are living a live thriller everyday, I hope you know that! They even tax our houses! I mean, those of us who were lucky enough to not pay rent, and reside in their own property, now must pay a special annual ‘immediate contribution’ that is in analogy with the residence’s cms (e.g 5 euro per cm etc). NOt to mention the dramatic wage cut! We used to have a basic salary of around 800euros for a full-time position, and now it is reduced to 450E! And rents are about 300E, not to mention the electricity bill that is around 30E a month, and that you need at least 100E to eat (that is not for a family, I am referring to a single person’s needs!), and the telephone bills around 60E collectively (both cell phone and landline bills, depending on the average subscriber).
    Oh, and a slight but crucial correction to a ‘mistake’ I keep seeing on most Greek-related news from abroad: SYRIZA is not a party of Leftists; it has some groups that indeed are self-called Leftists, but in all, it is a collection of Radical Left people, and its leading party that, along with two others, founded the broader Coalition, SINASPISMOS (refered to simply as ‘Coalition’, i.e Coalition of the Left of Movements and Ecology) is a Europe-friendly and progressive Left!

  14. If you know your history – Greece is an artifical creation anyway.
    It was in modern form a silly nostalgia created by the british after WWI to be a foreign owned and controlled buffer zone between the rightful owners of those lands, the Turks & the Slavs. If the Turks hadnt got the warship etc etc, and been on the German side – the current defintion of Greece would not exist.

    Maybe now its time to redefine Greece. It can be condensed to be a black hole around Athens’ and all of the rest of Greece can transition to the surrounding nations.

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