Greece: Caught Between an Economic Rock and a Political Hard Place

Yesterday's elections gave Alexis Tsipras an unexpectedly large lead, confounding both the pollsters and most observers' expectations. This was an election won on feelings, not facts. Sven among SYRIZA's own voters, negative views of its handling of the economy failed to dent its lead.

Tsipras' tactic of positioning himself as the "new force", who defied an aggressive EU and secured an honourable deal after being pushed around, resonated with voters. His slogan "out with the old" managed to inspire faith in the face of remarkable economic decline, imposition of capital controls, and the signing of a very tough Memorandum of Understanding under his leadership.

Those who voted for SYRIZA yesterday bought Tsipras' rhetoric that he will be the Prime Minister to combat corruption. But the evidence so far is to the contrary. During his previous tenure, his government passed a law replacing judges with union reps in panels assessing civil servants' corruption allegations, and allowed those convicted of bribery to return to their posts after being convicted. Massive voter apathy (with the highest-ever abstention figures) and strategic voting due to the recent electoral law (giving a bonus of 50 MPs to the winning party) helped seal this outcome.

Compared with Greece's position in August, the current parliament might seem more stable. Tsipras now has control of his party; the left wing of SYRIZA has literally vanished, with no representation in parliament at all; and Tsipras can no longer be accused of having won the election on false pretences, since the MoU terms had been announced quite explicitly.

But politics may prove fickle. ND, PASOK and Potami, now firmly in opposition, are likely to be less sympathetic to a stronger Tsipras. The Troika will take a hard line, and Greece will have to undergo massive change. More importantly, the current government will need to push through root-and-branch reforms and run the country at a time when liquidity has evaporated, the migrant issue has become explosive, and big decisions including bank recapitalization and dealing with Non-Performing Loans, still lie ahead.

If the new government exhibits the same lack of managerial and administrative competence that we saw in the last few months, trouble will soon arise. Early reports on the new government's composition are worrisome. It seems there will be few changes to key ministers, despite significant issues with operational efficiency over the last few months. A lot will hinge on the selection of the Finance Minister; a strong position for Mr Houliarakis, who has the creditors' trust, would make a difference, as would the use of outside experts, which does not appear likely. Barring pleasant surprises, Greece may be back in the headlines sooner than we would wish.

SYRIZA, as expected, fell short of an outright majority. The big news from this election was that SYRIZA's right-wing coalition partners over the last seven months, ANEL, again got past the 3% mark, and so will be represented in parliament. This means SYRIZA can partner with them once more. This might seem ironic, since the only thing that united them in January was their opposition to the Troika and their desire to repudiate the MoU. Now, with both parties having performed a volte-face, they should have little in common beyond a populist style, nationalism and a preference for an intrusive state. ANEL's electoral success means that SYRIZA will not be forced to work with the centre-left PASOK and Potami parties, which would have collectively provided a substantially bigger majority in parliament.

With a majority of just five seats, the new SYRIZA/ANEL government will soon be tested. Investment will not flow in before the first review of the new MoU is completed, since investors will need to see some clear signs of improvement before committing more funds. Political stability and administrative efficiency, or at least the ability to respond to the Troika requests, will judge the next steps in Greece. The bar is very high, so we can expect a tense period.

The change needed in Greece should not be underestimated. The Government will be called upon to legislate broadly and deeply to transform the organisation of the Greek state. The changes Greece has agreed to are anathema to both SYRIZA and ANEL politics. Yet any effort to amend the MoU will not be warmly received. There is deep fatigue within Greece, and hardliners in the EU may be waiting for cracks to appear so they can justify a divorce from the Euro. Also, excessive reliance on taxes will soon lead to popular resentment, and may stifle the economy.

The good news is that, politically, Tsipras has shown he is the only game in town. Such a victory should, in principle, calm nerves and give a sense of stability. Yet this may be short-lived. With little appetite to restrict the role of the state and no clear plan to attract investments, or at least avoid discouraging them, the new Government may soon find itself between an economic rock and a political hard place.