Europe's biggest challenge to austerity economics began in earnest Monday, when Syriza party leader Alexis Tsipras was sworn in as prime minister and recruited a coalition partner that shares its fierce anti-austerity views.
Syriza won the Sunday election with a pledge to end the austerity demanded by Greece's international creditors, known as the Troika, and write off a chunk of its debt. But on Sunday and Monday, after Mr. Tsipras provocatively announced that the deal with the Troika was "a thing of the past," representatives of the creditor countries were quick to warn Syriza not to get its hopes up.
One rebuke came from Dutch politician Jeroen Dijsselbloem, chairman of the Eurogroup, the 19 euro zone finance ministers who met in Brussels on Monday. "Working within the euro zone means they will comply with all the rules and agreements that we have within the euro zone," he said. "We have already done a lot to take off the debt burden, by reducing interest rates, allowing longer periods for them to repay loans, so there doesn't seem to be a great urgency there."
The determination by Syriza to overhaul Greece's bailout terms and the apparently equal determination by the Troika – the European Union, the European Central Bank and the International Monetary Fund – to resist an overhaul will inevitably put the two sides on a collision course. The question is whether a face-saving compromise can be found.
Economists and currency analysts do not rule out the possibility of a Grexit – a Greek exit from the euro zone – if the negotiations turn hostile, break down and trigger a default on Greece's debt. In a note, Steen Jakobsen, chief economist and investment officer of Denmark's Saxo Bank, said "Greece in reality has little choice: Comply with the Troika or leave the euro."
Greek political analyst George Tzogopoulos, of the Hellenic Foundation for European and Foreign Policy, said Syriza lacks negotiating power with the Troika. "I suspect they will give Tsipras something, but not much," he said. "The fact that Greece has not implemented a lot of structural reforms is not lost on the Troika." More austerity had to be applied because Greek government did not implement the reforms."
Greece might be able to secure another extension on the debt maturities on the €195-billion ($273.7-billion) EU portion of its bailout loans, or a lower interest rate. On the austerity front, it might be able to secure the right to report a somewhat smaller primary surplus – the budget surplus before debt payments. That would allow Greece to devote a bit more money to social spending.
But anything more ambitious, such as a debt writeoff, would probably meet formidable resistance in Brussels. "Writing off debt in nominal value, I don't think there's a lot of support for that in the euro zone," Mr. Dijsselbloem said.
Syriza won 36.3 per cent of the voting, handing it 149 seats in the Greek parliament, two short of a majority. Within hours of his victory speech, Mr. Tsipras formed an alliance with Independent Greeks, a small party that won 4.7 per cent of the vote and 13 seats. If the alliance is formalized, the ruling coalition will have 162 seats. A clear majority is crucial because Syriza will no doubt have dissenting voters within its own party on some critical issues.
Syriza and Independent Greeks make odd partners. The latter is a right-wing party that shares little with Syriza other than a staunch commitment to end the austerity measures that each blamed for pushing Greece into a depression that saw its economy shrink by at least 25 per cent after the 2008 financial crisis.
Mr. Tsipras is expected to unveil his cabinet on Tuesday and the Troika will be keen to learn the identity of the finance minister who would lead any negotiations to try to end austerity. The leading candidate for the job is thought to be Yanis Varoufakis, 53, the Greek-Australian economist who teaches at the University of Athens.
"We must be careful not to toy with fast and loose talk of Grexit. Grexit is not on the cards." he said in a BBC radio interview.
European markets on Monday reflected no sense of concern that Greece might be headed to the exit. European stock indexes rose, as did the euro. The Greek markets, however, did not escape damage. The Athens bourse, dragged down by the banks, fell 3.2 per cent. Greece's Eurobank, which is partly owned by Prem Watsa's Fairfax Financial of Toronto, lost 10 per cent on concerns that a showdown with the ECB could deprive the Greek banks of emergency funding. The yields on Greece's 10-year sovereign bonds rose 0.6 of a percentage point, to 8.8 per cent, while the bonds of other European countries remained flat.