Last week, after the Greek parliament legislated away the country’s sovereignty, PM Alexis Tsipras executed a cabinet "reshuffle" aimed at ridding his government of "radical" leftists who oppose the conditions attached to the country’s third bailout package.
The move was confirmation of what we’ve said for months [9]. "It is becoming increasingly clear that the Syriza show will ultimately have to be canceled in Greece (or at least recast) if the country intends to find a long-term solution that allows for stable relations with European creditors," we argued in May.
That’s a nice way of saying this: EU officials are determined to effect political change in Athens because i) Syriza, as it existed before last week simply wasn’t receptive to EU demands around fiscal discipline and stepped up austerity, and ii) allowing the new Greek government to push back forcefully against the troika risked emboldening political sympathizers in Italy, Spain, and Portugal.
In short, "come hell, high water, or 'Grimbo,' the EU was going to extract its pension cuts and VAT hikes from Tsipras, and not because anyone seriously thinks it will make a difference in terms of putting the country on a 'sustainable' path, but because the EU simply cannot afford for Syriza sympathizers in more economically consequential countries like Spain to get any ideas about rolling back austerity (of 'fauxsterity' as it were) and using EMU membership as a bargaining chip."
With recent events having confirmed everything we’ve said about the troika’s intentions to usurp the democratic process using financial leverage, the question now turns to whether Brussels’ hardline negotiating stance and, more importantly, Germany’s steadfast refusal to discuss "classic" debt writedowns in the face of pressure from the Christine Lagarde (who can’t decide if the IMF is the "good" cop or the "bad" cop), has had the intended chilling effect on other anti-austerity political movements across the EMU.
As noted last week, Nacho Alvarez, economic policy chief for Podemos (the ascendant, anti-austerity Spanish political party led by Pablo Iglesias), was careful to differentiate Spain’s situation from that of Greece in what certainly appeared to be an effort to play down the idea that talk of Greek debt relief would cause Podemos to seek re-profiling for Spain. Via Bloomberg:
Greece and Spain are 2 different economies that require different strategies, Nacho Alvarez, said Tuesday in Madrid.
Alvarez says Greek deal is not a failure for Podemos, but for Europe.
Alvarez says change doesn’t necessarily mean restructuring of public debt.
Fast forward to Monday and it’s readily apparent that Iglesias understands precisely what took place in Greece. Again, from Bloomberg [10]:
Creditors Tried to Carry Out a Coup on Greece, Podemos' Iglesias
Creditors tried to bring Greece to its knees and enforce a new "Versailles Treaty," Pablo Iglesias, leader
of anti-austerity party Podemos, said Monday
Iglesias says he has a lot of sympathy for Greek PM Alexis Tsipras
Tsipras succeeded in bringing debt relief to negotiating table: Iglesias
Iglesias says Spain situation is different to that of Greece: "Our problem isn’t external debt, creditors or Germany, it’s the Spanish oligarchy"
This is merely obfuscation (while Spain's debt-to-GDP ratio is considerably lower than that of Italy and Portugal, to simply suggest that the country has no "problem" with external debt, creditors, or most importantly, Germany is to overstate the case) and willing obfuscation at that. With elections just around the corner, Iglesias isn't keen on provoking Brussels (or Berlin) - yet.
But the real question is whether or not the ATM lines, empty shelves, and gas station queues in Greece have had their intended psychological effect on Spanish (and Portuguese) voters. In other words, the question is whether the troika has succeeded in undercutting the democratic process outside of Greece by indirectly strong-arming the electorate. Bloomberg has more on the periphery's "spooked" voters.
* * *
From Bloomberg [11]
Syriza’s White Flag To Spook Voters Beyond Greece
What happens in Greece doesn't stay in Greece.
The capitulation of the ruling Syriza party as well as the critical condition of the Greek economy should scare voters away from parties advocating similar policies elsewhere in the euro area. As hope turned into disillusion, any political contagion effect is now set to play against more extremist movements. That's especially true for Spain and Portugal where general elections will be held this year.
The financial contagion from the recent Greek showdown was limited, judging by sovereign yields remaining near historical lows across the euro area. But what about the political contagion? The combination of high debt, sluggish growth, low inflation and austerity fatigue has boosted the popularity of pro-default parties in many euro-area members.
The victory of Syriza in January put political risk back on investors' radar and raised hopes for parties advocating a similar anti-austerity, pro-default policy agenda in other euro-area countries. One only needed to pay attention to the loud cheers and applause that greeted Greek Prime Minister Alexis Tsipras as he entered the European Parliament last week to see the breadth of the Greek leader's appeal. Supporters included those from Spain's left-wing Podemos party, the anti-establishment Five-Star Movement in Italy and the right-wing National Front in France.
In this context, the Greek negotiations were not only an arm wrestling match between Greece and its creditors. Economics aside, ruling parties acting as creditors didn't want to miss the opportunity to pull the rug from under the feet of their own opponents at home by humiliating Syriza in Greece. The will to send a clear message was all the stronger as Spain and Portugal — two former ailing euro-area nations — will hold general elections later this year.
Podemos, one of Syriza's closest allies in Europe, managed to win — in coalition — the city halls of Madrid and Barcelona during May's local elections. And it is polling quite close to the two traditional center-left and center-right parties for the general elections that will take place before the end of December. This explains why Spanish officials took a hard line against Tsipras during the negotiations: giving ground to Syriza in Greece would have meant giving ground to Podemos in their own backyard.
Now, Podemos as well as other similar parties will probably suffer from Syriza's retreat. While the hardcore of Podemos voters will read the outcome as an even stronger need to change the economic and political order in Europe, the more undecided voters will probably look twice at the Greek economy — held in stasis by bank holidays and capital controls — before risking voting for Podemos. What happened in Greece will probably act as a deterrent.
And there's little doubt that the traditional parties across the euro-area will use the Greek situation as a political scarecrow. Not only in Spain.
* * *
(A troika public service announcement: voting for "radical" leftists may lead to capital controls)
