The Syriza party's big win in Greece's legislative election last weekend is a turning point in the long political fight over Europe's botched recovery from the financial crisis and world recession of 2008-2009. The occasion presents a milestone for the eurozone, which has been plagued by mass unemployment and economic stagnation, but it remains to be seen how much this election will speed up the reversal of the destructive policies that brought the eurozone to its present state.
"Democracy will return to Greece," declared Alexis Tsipras, the charismatic 40-year-old leader of Syriza who will become the country's youngest prime minister in 150 years, as he cast his vote in Sunday's election. "The message is that our common future in Europe is not the future of austerity."
His remarks provide a concise political statement that goes to the core of the main problem afflicting both Greece and the eurozone. Simply contrasting the economic recovery of the United States — the epicenter of the earthquake that upended global finance in 2008 and 2009 — with that of Europe makes plain what a difference democracy makes.
Even the limited-accountability, Wall Street-dominated form of democracy that prevails in the US proved vastly superior to the economic autocracy of the eurozone. Although the Great Recession was America's worst downturn since the Great Depression, it lasted just 18 months before the recovery began. The eurozone had a recession of similar length, then lapsed into another one in 2011, and has only recently begun a sluggish recovery. As a result, unemployment in the region stands at 11.5 percent, more than twice that of the United States (5.6 percent).
The difference is due to economic policy. The US got a modest stimulus; the weakest economies of the Eurozone got budget tightening. The Federal Reserve purchased government bonds under a program of "quantitative easing" beginning in 2008, while the European Central Bank did not announce a similar program until last week.
Unelected European authorities have been using the crisis to force the governments of more troubled member nations to accept economic changes that the electorates of these countries would never vote to approve.
Officials making policy decisions in the US were at least somewhat accountable to an electorate. Voters in the eurozone removed more than 20 governments from power, but the destructive policies imposed by unelected European authorities — the European Commission, the European Central Bank, and the International Monetary Fund — have marched forward for years, effectively disenfranchising popular sentiment in Europe. Perhaps nowhere in the eurozone have these policies failed more miserably than in Greece.
The election of Syriza is the biggest breakthrough in the painfully slow-motion process of European voters reclaiming their democratic input on fundamental economic policy issues. An anti-austerity backlash put Socialist French President François Hollande in office in 2012, but he didn't deliver the economic relief he had promised. Now it is Tsipras's turn.
Syriza has certain advantages due to the passage of time. First, the fiscal austerity that Greece signed on to — a combination of tax increases and spending cuts to reduce the budget deficit — is pretty much done. Budget-tightening measures amounted to just 0.3 percent of GDP for 2014, as compared to 3.2 percent, 3.8 percent, and 5 percent respectively in the three previous years. This explains why the economy finally began to grow at 0.6 percent of GDP for 2014. It was not because the tough medicine of austerity had "worked," as some now disingenuously claim, but because it basically came to an end.
There are always many factors that affect growth, but the effect of the austerity measures on Greece was so severe that, as a matter of national income accounting, it is clear that the fiscal austerity drastically worsened and prolonged the country's recession.
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Greece has also completed the economic adjustment that its creditors have put forth as a main objective of austerity. Import spending has fallen by 36 percent — one of the largest adjustments in the world — and its current account and actual primary budget balance are now in surplus. No one can credibly argue that the country is living beyond its means.
But the recovery is still too weak, slow, and fragile to take Greece out of the mass unemployment that the European authorities have unnecessarily inflicted on it. Unemployment is currently at 25.8 percent, and nearly double that for youth. IMF projections — almost all of which over the past five years have been overly optimistic — estimate that unemployment will still stand at nearly 16 percent in 2018.
To bring the country to full or even reasonable levels of employment, the new government will have to enact a fiscal stimulus. Tsipras proposes rolling back some of the regressive changes implemented over the past few years, like minimum wage cuts and the removal of collective bargaining rights. He also wants to renegotiate the country's oversize debt, which is currently more than 170 percent of GDP. It has worsened drastically from 115 percent of GDP in May 2010, when the first IMF agreement was signed and many of us warned that austerity was the road to ruin.
The people of Greece have spoken, a government has been formed, and now the ball is in the court of the European authorities. They will have to decide whether they have accomplished enough in terms of restructuring eurozone economies by chipping away at the welfare state, reducing labor's bargaining power, cutting healthcare spending (by 40 percent in Greece), and generally constructing a more unequal society. For years now, European authorities have been using the crisis to force the governments of more troubled member nations to accept economic changes that the electorates of these countries would never vote to approve. That is the main reason that these economic troubles have gone on for so long.
It is a dilemma for the advocates of austerity, because if they give in to Syriza, Spain could be next. The leftist Podemos party, which rose from its founding to lead opinion polls in just the past year with a program similar to Syriza's, could benefit greatly from a successful Syriza administration. Spain's economy is more than six times larger than that of Greece.
If the European authorities refuse to bargain with Syriza, there is a risk that Greece defaults and ends up abandoning the currency and monetary union.
Contrary to popular belief, the authorities do not fear that a Greek exit could cause a serious financial crisis of the euro. The ECB can create money like the US Federal Reserve, and has all the firepower it needs to make sure that a Greek exit would not cause serious damage to the eurozone financial system. ECB President Mario Draghi proved this in July 2012 when he brought an end to the financial crisis of the eurozone — and doubts about the survival of the single-currency bloc itself — by merely stating that he would do "whatever it takes" to defend the euro.
The real fear is that Greece might leave the currency and, after weathering the flight of capital and an initial crisis, recover much more quickly than the rest of Europe, prompting other governments to also want to leave the euro. The entire currency union could be threatened. Bluffs and bluster fill the financial press at the moment, but the smarter people in Brussels and Frankfurt understand this reality, and will want to make some concessions to the new government in Greece.
Either way, this is the beginning of the end of the eurozone's long nightmare.