Despite Promised Reforms, Greece's Troubles Aren't Over
By: Stratfor Analysis | Stratfor.comOctober 8, 2015


Editor's Note: Greece is a country in crisis. Facing financial, political and social uncertainty, Greece's ruling Syriza party has cut a deal with the European Union which should keep the Greek economy afloat at least for the time being. But European institutions and prominent member countries such as Germany are near the end of their patience, and it is far from certain that the conditions of the deal will be followed through by the Greek side. The situation is precarious, and it is highly possible that the agreement will collapse. Stratfor is logging the latest developments in this crisis update.

Oct. 8

The new Greek government has been finalized and can begin to make some tough changes to the country's economy. On Oct. 8, the administration won a confidence vote in the Greek parliament, the final hurdle it had to clear before it could begin to govern. As expected, Greek Prime Minister Alexis Tsipras received the backing of his Syriza party and its junior coalition partner, the Independent Greeks, which jointly control 155 of the parliament's 300 seats. The event marked the end of the transitional period that began in late August, when Tsipras called for early elections. Now, Athens will shift its attention to passing a series of controversial reforms needed to honor the terms of Greece's bailout program.

To do so, Tsipras will likely implement a two-step strategy. First, he will use the remainder of the year to push through just enough reforms to obtain the next tranches of financial assistance. These reforms include the introduction of tougher legislation against tax evasion, the elimination of energy subsidies for the industrial and agricultural sectors, the limitation of early retirement schemes as well as the completion of pending privatizations. Tsipras' immediate goal is to receive 3 billion euros (about $3.4 billion) in bailout funds and as much as 25 billion euros to recapitalize Greek banks by the end of December.

The second step of his strategy is to convince Greece's creditors to open negotiations on plans to reduce the country's debt burden. Over the past few weeks, several EU officials have suggested that Greece should be given longer maturities, lower interest payments and a grace period in its debt repayments. On Oct. 7, France sent a positive signal to Greece when French President Francois Hollande said in a joint speech with German Chancellor Angela Merkel that Paris supports the idea of negotiating the future of Greece's debt.

But Tsipras will encounter many obstacles as he tries to realize his plan. The Greek economy will continue to contract in 2016, increasing the likelihood of social discontent and opposition to austerity measures. For the next few weeks, Tspiras can still harness the wave of support he received in the wake of his Sept. 20 electoral victory to pass reforms. But as the country's crisis lingers, popular pressure will force the government to slow the pace of reform in 2016, which in turn could create problems for Tsipras' small parliamentary majority as lawmakers begin to oppose unpopular reforms.

Athens will have a similar experience when dealing with its creditors. For the rest of the year, the Eurogroup will be willing to support the newly elected government, and Tsipras will not face any especially serious problems on that front. While there will probably be some delays in the review of Greece's bailout program and the disbursement of money, they should not put the country in any danger. But the creditors' patience will eventually run out. As Stratfor predicted, the Eurogroup chose to break Greece's bailout into a series of small tranches linked to reforms, which could then be broken into even smaller sub-tranches. For example, the bloc will disperse the next tranche of 3 billion euros in two smaller sub-tranches within the next three months. The scheme, which is meant to keep Greece on a tight leash, will probably create problems in 2016 as Athens slows the pace of reform and its creditors become increasingly nervous.

Next year, three countries will be key players in the Greek negotiations: Germany, the Netherlands and Finland. Each of these governments is under pressure from domestic conservative forces to adopt a hard line with Greece — pressure that Europe's ongoing immigration crisis has only made worse.

In Germany, some members of the ruling party have criticized Berlin's management of both the Greek bailout and the immigration crisis. Meanwhile, in Finland, these issues have created significant political friction within the Finns Party, a Euroskeptic party that is currently a member of the country's governing coalition. The immigration crisis has also renewed support for the Netherlands' opposition Party for Freedom, which is generally skeptical about financing Athens. Pressure from these conservative forces will likely push the German, Dutch and Finnish governments to get tough with Greece.

Even if Tsipras manages to overcome these political issues, the Greek economy will remain fragile for the foreseeable future. The International Monetary Fund recently reported that Greece will not meet its previously anticipated primary surplus of 0.5 percent of GDP in 2016. The institution went on to suggest that Athens introduce additional measures of 1.35 billion euros in 2015-2016 to meet the bailout targets. The IMF expects the Greek economy to contract by 2.3 percent this year and to shrink again in 2016 by 1.3 percent. More important, it also expects Greek unemployment to continue growing next year. As a result, Greece will likely experience a period of relative calm in the next quarter, but the troubled Mediterranean nation's problems will undoubtedly return with the start of the new year. 

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