Why the Greek elections are so important for the eurozone

Why is it that the forthcoming elections on 25th January in a country which accounts for a mere 2 per cent of the eurozone's GDP are grabbing the news headlines? The announcement of a snap election by Prime Minister Samaras came after his 2015 budget was rejected by the eurogroup in early December and he then effectively lost a “vote of confidence” in parliament when he failed to get his presidential candidate elected. The process has unsettled the markets which worry about the possibility of Greece exiting the euro.

There is a lot at stake. After six years of austerity when Greece saw its GDP fall by 25 per cent and unemployment hit a high of 27 per cent the Greeks are beginning to unite behind a slogan of “change”—a message that parties of the left and right are trying to sell to the electorate. Whether they can achieve it is another matter. It’s long been recognised that Greece needs to reform its sclerotic and corruption-riddled public administration system, described by the OECD as one of the worst in the developed world. Tax collection is hampered by tax avoidance on a grand scale as well as suspect practices by tax officials, and the bloated public sector has for decades been creaming off the best people. At least its size is finally falling under pressure from the troika of lenders which includes the International Monetary Fund, the European Central Bank and the European Union countries.

The average Greek feels that not only have they had to suffer a 35 per cent cut in wages, salaries and pensions, but that the welfare and health systems are not able to sufficiently support them. The result is huge suspicion of the ruling political and business elite who they perceive as having survived the recession intact.

This has been reflected in political protest. Since the centre-right New Democracy-led coalition of Antonis Samaras came to power in 2012 the disenchantment of the electorate has resulted in a huge shake up of a decades-long political system in Greece. Pasok, the Socialist party that is currently the junior partner in the coalition, and which has held the reins of power on and off since the 1950s (with the brief interruption of a seven-year military dictatorship under a group of colonels in 1967-74) has been dramatically reduced in size. Due to Greece's unique mix of “first past the post” and proportional representation electoral system, it may not even attract the 3 per cent needed to get any MPs elected. The party is tainted by the perception that they are responsible for creating the conditions which have led to Greece's economic crisis.

The problems for the fragile New Democracy-led coalition began when the small Democratic Left party defected from the coalition in June 2013 over disagreements around the country’s austerity package. Then, New Democracy came second to the radical left anti-austerity party Syriza in the May 2014 European elections. Syrzia consists of a group of left-wing parties and was first formed in 2004. Other new parties have also emerged including an extreme right-wing anti-immigration party, Golden Dawn, although their leaders are now in jail accused of criminal activities and their support has waned.

It’s possible that the balance of power after the elections might be held by Potami (river), a centre left-party started by a journalist in 2014. The ex-Prime Minister George Papandreou has also started his own Movement of Democratic Socialists (Kinima) which may get enough votes for him to get re-elected as an MP and for his party to be courted by others looking for coalition partners.

SyrIza are the favourites to be the largest party this Sunday. This possibility has sent shock-waves across Europe as they fear the prospect of a default if Syriza fails to renegotiate the country's huge €320 sovereign debt which includes the bailout package of €240b, mostly owed to European governments, the European Central Bank and the International Monetary Fund.

Talk of Greece leaving the euro, the so-called “Grexit” has re-emerged and everyone worries about the possible contagion for other countries which also have a huge and unsustainable deficit to deal with. There are a number of countries that have debt to GDP ratios above 100 per cent such as Ireland, Portugal, Italy and Belgium and their debts may also need to be restructured.

So, Europe is waiting with bated breath. And trying to guess what the other Europeans will do if a new Greek government goes to the eurogroup with extra demands and asking for debt restructuring and debt forgiveness. Who will blink first? The Greeks believe they hold all the cards because the Europeans want to preserve the unity of the eurozone. They may be wrong. But at least the massive €1.1 trillion quantative easing package due to start in March 2015 just announced by Mario Draghi, Head of the European Central Bank, shows that he at least is, true to his word, prepared to do all he can to save the euro.