Tanya Ashreena
Greece's newly elected Prime Minister Alexis Tsipras winning a confidence vote on his plan to cancel the unpopular bailout programme has raised fears of further instability in the Eurozone.
Tsipras, who led the hard-left Syriza party to victory last month by vowing to end austerity measures imposed under the bailout, is backed at least 75 percent of the Greek population, according to polls.
Tim Stevenson, fund manager at Henderson EuroTrust plc, spoke to Zee Business on what the recent political events mean for Europe.
What do you think of recent political events in Europe?
At the end of January 2015, Europe found itself gripped by political uncertainty once again. As often the case in history, when the economic backdrop begins to improve (albeit only a tiny bit), the electorate looks at recent performance of political parties and decides that there must be a better way.
The immediate radical display of this is the election of Syriza in Greece under the charismatic and well-spoken Alexis Tsipras. His call to the electorate, like his open letter to the German people, is clear and concise, that the attempt over the last three years to reduce the burden of debt on ordinary Greeks has failed. That kicking debt further down the road no longer works.
Greece's key concern is that there is too much debt, and that the value of that debt must be written down.
Has the Greek population decided to move to the left?
The success of Syriza reflects a decisive step to the left – away from the “cosy” trading between centre-left and centre-right parties over the last few years. Clearly, Syriza does not want to leave the euro – why would they leave a currency union that has provided such low interest rates for so long? But they no longer want to pay the price.
Is there a risk of contagion?
Contagion is a real risk, as we saw in Spain, where thousands of people recently gathered in Madrid to support the popular Podemos party. The new left wing movement is headed by Pablo Iglesias who, like Tsipras in Greece, has promised to reverse austerity and tackle corruption.
Although there are signs that European economies are beginning to improve, the recovery has yet to properly gain traction. Meanwhile, support is diminishing for those established parties across Europe following the path of austerity. People do not want austerity anymore, and democracy-in-action could derail the progress made over the past few years.
Germany, among others, has been a model of virtue and good behaviour and it is understandable that they feel intolerant of those who have “misbehaved”. If the opportunity to reform is missed, many fear that the vicious cycle of economic misbehaviour - debilitating for European economies in the 1980s and ’90s - will begin once again.
Will growth revive in Europe?
With demand and economic growth low for so long - even with supportive action from the European Central Bank (ECB) - growth is likely to continue to remain low as the fear of radical structural change prevents any major step forward.
We have been anticipating that economic data in Europe will improve over the next few months, as strong money supply data has been indicating. But there are questions over whether it will be enough to decisively reduce unemployment rates, convince people the medicine is working and that sustainable growth is ahead.
What does Europe need to do in order to get back on the growth track?
ECB President Mario Draghi has been repeatedly making the point that the Central Bank can provide the framework for support, but Europe’s governments must commit to the necessary structural and labour market changes. Countries that have inefficient systems need to reform and collect their taxes. This should help to engender trust, not just from other governments but from financial markets as well.
Europe could still go dramatically wrong over the next 12 months unless someone can come up with a way of cancelling the debt built up by reckless previous generations, rather than kicking it down the road again. In this regard, Syriza and Podemos are making some valid points. But it is also clear that when reform does occur, economic growth must resume in a moderate and sustainable manner.
