As those who followed our coverage of Greece’s protracted negotiations with creditors are no doubt aware, Berlin’s effort to tighten the screws on Alexis Tsipras and Yanis Varoufakis was just as much about sending a message to the rest of the EU periphery as it was about putting Greece on some kind of “sustainable” path to recovery.
Greece is going to be a German debt colony for decades to come and everyone knew that going in.
The real risk was always that Spain, Portugal, and perhaps Italy would get the “wrong” idea about whether it’s possible to essentially threaten to expose the euro as dissoluble on the way to gaining leverage in debt negotiations with Brussels and the IMF.
In other words, it seemed at times as though Greece was betting that the notion of the EMU as an unbreakable bond between member countries would ultimately prove to be so important, that the troika would bend over backwards to avoid Grexit.
Of course it didn’t quite work out that way and the Greek people had their referendum “no” vote sold down the river by Tsipras.
When it comes to Greece, Brussels and the IMF achieved what they set out to accomplish as soon as Syriza came to power in January: namely, they were successful in subverting the democratic process by using the purse string to turn Tsipras into a pandering technocrat and to gut Syriza of its more “radical” members like Panagiotis Lafazanis.
The troika had hoped that Greece’s horrific experience during negotiations and the subsequent outcome which saw a beleaguered Tsipras reduced to a shadow of his former revolutionary self would be enough to deter leftists in other periphery countries from attempting to go down the Syriza route by shunning austerity and pushing for debt relief. As we put it a few months ago, 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.
Well, sorry Brussels, but it looks like Athens may have opened Pandora’s Box. On the heels of inconclusive elections held earlier this month, Portugal’s Socialist leader Antonio Costa is ready to align with the Communists and with Left Bloc to form a government in defiance of the Right-wing coalition. Here’s The Telegraph with more:
Antonio Costa, Portugal's Socialist leader and son of a Goan poet, has refused to go along with further pay cuts for public workers, or to submit tamely to a Right-wing coalition under the thumb of the now-departed EU-IMF 'Troika'.
Against all assumptions, he has suspended his party's historic feud with Portugal's Communists and combined in a triple alliance with the Left Bloc. The trio have demanded the right to govern the country, and together they have an absolute majority in the Portuguese parliament
The country's president has the constitutional power to reappoint the old guard - and may in fact do so over coming days - but this would leave the country ungovernable and would be a dangerous demarche in a young Democracy, with memories of the Salazar dictatorship still relatively fresh.
"The majority of the Portuguese people did not vote for the incumbent coalition. They want a change," said Miriam Costa from Lisbon University.
Joseph Daul, head of conservative bloc in the European Parliament, warned that Portugal now faces six months of chaos, and risks going the way of Greece.
Mr Costa's hard-Left allies both favour a return to the escudo. Each concluded that Greece's tortured acrobatics under Alexis Tspiras show beyond doubt that it is impossible to run a sovereign economic policy within the constraints of the single currency.
The Communist leader, Jeronimo de Sousa, has called for a "dissolution of monetary union" for the good of everybody before it does any more damage to the productive base of the European economy.
His party is demanding a 50pc write-off of Portugal's public debt and a 75pc cut in interest payments, and aims to tear up the EU's Lisbon Treaty and the Fiscal Compact. It wants to nationalize the banks, reverse the privatisation of the transport system, energy, and telephones, and take over the "commanding heights of the economy".
Catarina Martins, the Left Bloc's chief, is more nuanced but says that if the Portuguese people have to choose between "dignity and the euro", then dignity should prevail. "Any government that refuses to obey Wolfgang Schauble must be prepared to see the European Central Bank close down its banks," she said.
And more from FT:
The appointment of a government led by the Socialist Party (PS) would represent a marked shift from the centre-right government that steered Portugal through a punishing bailout in collaboration with international lenders, to a leftwing alliance determined to roll back austerity.
“Europe is watching and is very concerned,” said Mujtaba Rahman, head of European analysis at the risk consultancy Eurasia Group. “Having just stabilised Greece and heavily distracted by migrants, the last thing Europe needs is a renewed crisis in the south.”
Mr Passos Coelho’s Forward Portugal alliance (PAF) won 38.6 per cent, the largest share of the vote, in the October 4 election, but lost its outright majority in parliament. This means a minority centre-right government could be brought down by the combined votes of left-of-centre parties.
No government on the left or right could hope to survive without support from the PS, which won 32.3 per cent, leaving Mr Passos Coelho nine seats short of an overall majority in the 230-seat parliament.
But talks, encouraged by the president, between Mr Costa and Mr Passos Coelho on PS support for a minority centre-right government have collapsed.
In other words, this is the absolute worst case scenario for Berlin and Brussels and indeed this is precisely what the troika was trying to deter by adopting a hardline approach during the fraught negotiations with Greece.
Who could have seen this coming, you ask? Well, here's what we said in July:
In this way, while the outcome of the Greek situation is currently unknown, it has also become moot, because at this very moment, politicians from leftist movements in the periphery are drafting memos demanding that the IMF evaluate their own debt sustainability. Or rather unsustainability.
And here's our assessment from way back in May:
Perhaps it's time for Greeks to ask themselves if this is the kind of "European" partner they want to bind their fate to: a partner that will do everything in its power to subvert a democratically elected government, even if, or rather especially if, it means a wholesale "bail-in" for Greek depositors, who may lose as much as 70 cents on every euro.
After Greece is done soul searching, the people of Spain, Italy, Portugal and Ireland should ask the same question, because if we have a Grexit in two weeks, then these countries are next and indeed, Portugal’s Socialist Party is pledging to implement a “reverse policy” as it relates to austerity and relations with the Troika.
So the takeaway from the above is that allowing the Left coalition to form a government risks throwing the entire EMU back into crisis mode, but attempting to restore the political status quo by decree means setting everyone up for a prolonged period of indeterminacy.
Obviously that's a lose-lose for Silva, but as of Thursday evening, a decision has been made. In what is bad news for anyone who hoped Portugal wouldn't end up mired in an intractable political stalemate, President Anibal Cavaco Silva has appointed Pedro Passos Coelho to serve another term as PM.
That's bound to make the situation worse given everything noted above about the relationship between Costa and Coelho. As Communist leader Jerónimo de Sousa said earlier this week, appointing Coelho as prime minister would be “a manifest waste of time”.
So here again, just like in Brazil and Turkey, we're set to see political turmoil take center stage, and the EU will be forced to stand by and hope that Portugal remains "in the fold" so to speak when it comes to austerity and the outward appearance of fiscal rectitude.
Oh, and if you're looking for someone who apparently did not think it was possible that the Left might end up banning together to make a serious political power play in Portugal, see below...