In the Greek elections this January, Syriza, a party of the left, received 36.3% of the national vote and formed a coalition government under Alexis Tsipras, backed by the centre-right Party of Independent Greeks. Until five years ago, Syriza had never received more than 5% of the national vote.

This dramatic political turnaround could not have happened were it not for the devastating impact of unprecedented austerity policies. These were imposed over a period of five years, from 2010 to 2015, by two successive Master Financial Assistance Facility Agreements, signed between the Greek government and the so-called Troika (European Commission, European Central Bank and the IMF) in exchange for 226.7 billion euros in bail-out loans. These were channeled almost exclusively to the European banking system to avoid the write-down of previous bad loans to the Greek government and banking system, as well as to pay back interest and capital operations.

Plummeting income, rising unemployment

Only 11% of bail-out loans went to finance the government accounts. Conditionality for the bail-out loans included sharp cuts in fiscal expenditures and social benefits, steep rises in direct and indirect taxes and across-the-board cuts in wages and pensions, exceeding in many instances 40%. This resulted in a massive 25% drop in national income, raised the average unemployment rate to over 27%, increased over-indebtedness and exacerbated poverty and inequality. Middle-class voters of different political persuasions voted massively for Syriza, demanding a new deal for Greece within the Eurozone to put an end to the harsh austerity policies and map a feasible pro-growth strategy.

Difficult negotiations between the new Greek government and its Eurozone partners have already started. After a failed attempt to reach a preliminary agreement on 16 February, a new statement was finally agreed upon a week later accompanied by a preliminary list of conditional structural measures and reforms to be finalized by the end of April and implemented by the end of a four-month period; the list includes prior commitments agreed upon by the previous government subject to selected revisions to be suggested by the current government in the spirit of “given flexibility”.

Based on the preliminary agreement, Greece will not receive any funds from its official creditors ‒ including the 1.9 billion euros in SMP profits that have already been remitted by the ECB to Eurozone countries ‒ until a review of the bail-out package is successfully completed at the end of the four-month period. Furthermore, the Greek government is not allowed, for the time being, to issue more short-term T-bills given that the ECB-imposed limit (set at 15 billion euros) has already been reached, while government bonds are not acceptable by the ECB. Thus, liquidity to the banking system is currently provided only through the Emergency Liquidity Assistance programme of the ECB at higher costs.

Tricky talks but tangible gains

Despite appearances, the negotiating process and the agreement reached has brought about some tangible political and economic gains both for the Greek government and Eurozone leaders; it also poses risks that need to be carefully addressed.

Putting aside the open disagreement of those few who opt for a clear break with the past even at the cost of a complete breakdown of negotiations or even “Grexit”, the Greek government’s popularity ratings have exceeded 80% as a consequence of its negotiating stance. For most Greeks, it was the first time since 2010 that a Greek government highlighted to the creditors and the international community the dramatic consequences and the fallacy of an ill-designed austerity and structural-reform programme that not only impoverished large segments of the population, but also exacerbated the debt burden, deteriorated investment prospects, led thousands of highly-skilled professionals to leave the country and worsened the country’s long-run competitiveness prospects.

Making the case for Europe

For the Eurozone’s institutional leadership, the provisional agreement demonstrated its capacity to take into account and respect democratic processes and outcomes, to exhibit needed openness and flexibility in the design and conduct of policy and to underpin the European social model.

At a time when Euro-scepticism is on the rise across the continent, forging an agreement across governments of different political orientations that upholds fundamental European values has enhanced the legitimacy of the European project. It has also delivered a strong message against the worrying rise of far-right extremism.

The content of the agreement also provides potential economic advantages to both negotiating parties. For the Greek side, it provides a degree of freedom to the government to propose changes in the policy mix and the choice of structural reforms; in so doing, the government can pursue its objective to shift the burden of adjustment to higher-income groups, address tax evasion and enhance social fairness and social protection. Furthermore, the language of the agreement opens up the possibility of a reduction in the primary surplus target for 2015 below 3% of GDP to a level that “takes into account the economic circumstances”. “Excessive, self-defeating austerity is off” proclaimed a German analyst.

The outcome will be beneficial not only for Greece, but for all Eurozone member countries. For the Eurozone, which continues to be characterized by secular stagnation and deflation, reaching a compromise in the Greek case offers an opportunity for a needed and wanted turn-around in policies by providing less austerity, more flexibility and better sequencing. Such a turn-around will have positive repercussions for trade, investment, growth and employment. Consensual politics strengthens the arm of those institutions and political forces (e.g. Euro Parliament, ECB, Commission, Social Democrats, Greens, etc.) that have pushed for more anti-cyclical, pro-growth policies or have sought opportunities to alter the policy mix actually pursued in their own country.

Last but not least, the prospect of a reasonable compromise settlement has strengthened the legitimacy and viability of the Eurozone against those Euro-sceptics who have prophesied the dissolution of the currency area in the face of diverging preferences and underlying economic imbalances.

The challenges ahead

Despite these potential benefits, there are a number of risks ahead that could impose heavy costs on both the Greek economy and the Eurozone. Mitigating them requires bold political decisions that bridge political differences and restore trust among partners who profess that they want to continue working together.

In the very short run, provision of liquidity to the economy is essential. An economy cannot run if consumers, investors or exporters do not have a minimal assurance that credit will continue to be available over the next six months. Linking the provision of ECB credit to the approval and implementation of structural reforms, which by their very nature take time to be properly designed and implemented, can easily backfire and has already started doing so: it fuels widespread uncertainty and deposit withdrawals and provides incentives for capital flight and quick-fixes. Conditionality needs therefore to be revisited: reform implementation needs to be linked to debt alleviation or development finance as opposed to short-run credit provision. The stick needs to be maintained but not kill the patient.

The second challenge concerns the issue of debt management. As pointed out by many economists as early as 2010 (Boone & Johnson, 2010; Cabral, 2010; Wyplosz, 2010; Eichengreen, 2010), Eurozone member countries’ external debt dynamics were toxic from the beginning. Even today – despite the Private Sector Initiative, which reduced the burden of its private debt by 130 billion euros in 2011-2012 – without official debt relief, Greece’s external indebtedness will continue to rise, sap domestic activity and crumble investment and growth prospects. Eurozone countries will have to continue to bail-out Greece through more loan extensions for the country to be able to pay back its creditors.

Debt relief can be achieved in a number of ways: rescheduling and re-profiling could be complemented with bilateral debt-equity swaps, the issuance of GDP-indexed bonds, equitization of debt, etc. underpinned by strong conditionality linked to the implementation of meaningful structural reforms. If not done, Greece will not be able to get out of its present low-productivity/over-indebtedness trap and the Eurozone will continue to bleed. The responsibility of both parties to reach a viable agreement is of critical importance for the future of Europe.

A new deal needs therefore to be forged between Greece and its Eurozone partners: one based on an effective political settlement that would strengthen the Eurozone by spurring growth, maintaining social cohesion and underpinning inclusive, democratic institutions. Such a new deal can indeed be a win-win game for both Greece and the Eurozone.

Author: Louka T. Katseli, ex-Minister of Economy, Competitiveness and Shipping and Labour and Social Protection of Greece; Professor, Department of Economics, University of Athens. She is a member of World Economic Forum Global Agenda Council on Public Finance and Social Protection.

Image: A man adjusts a Greek (L) and a European flag outside the Greek embassy in Brussels February 19, 2015. REUTERS/Yves Herman


Boone, P. and S. Johnson “Greece, the Latest and Greater Bubble”, Economix, 11 March 2010.
Cabral, Richard, “The PIGS’ External Debt Problem”, VOX CEPR’s Policy Portal, May 2010.
Eichengreen, Barry, “Portents of the Greek Rescue”, Eurointelligence, 15 April 2010.
Wyplosz, Charles, “And now? A dark scenario”,, 3 May 2010