During the desperate dying months of the second World War, British prime minister Winston Churchill staked his reputation on trying to keep Greece out of communist hands as the shadow of the Iron Curtain began to fall over the Balkans and eastern Europe.
Almost exactly 70 years later the prospect of a party with roots in communism taking power has again emerged.
Syriza, the radical left party led by Alexis Tsipras, is topping the polls ahead of the January 25th election in Greece.
The prospect of a Syriza victory has unsettled markets. It has also produced fresh headaches for the European Union institutions. Less than three months into their mandate, the new European Commission and European Council face the possibility of a new phase of volatility in financial markets. While dire economic figures over the past year have made it abundantly clear Europe's trenchant economic problems had not gone away, there has been widespread acceptance in Brussels that the acute phase of the debt crisis had passed.
Now, rather than busying themselves with the planned €300 billion investment plan and toying with ideas to stimulate employment, senior EU figures find themselves grappling with pressing issues such as debt restructuring and possible “Grexit”.
Disturbing developments
In fact the re-emergence of the Greek debt crisis shows how the financial crisis and the euro zone’s more deep-seated economic woes are inextricably linked. Much has been made of the new mechanisms in place to tackle a Greek debt crisis, including the €500 million European Stability Mechanism rescue fund and the commitment to buy bonds of bailout countries through the Outright Monetary Transactions (OMT) programme. But there have also been more disturbing developments since 2012.
The deteriorating euro zone economy could in many ways make a Greek debt crisis just as serious this time around. Deflation is of critical concern. The consistent trend that has seen the inflation rate gradually creep down, culminating in yesterday’s confirmation of a below-zero inflation rate, has implications for Greece. With deflation causing the real value of nominal debt to increase, the euro zone’s deflationary environment is bad news for Greece, given its enormous debt levels.
Two events due to take place before the Greek election will have vital implications for how the euro zone deals with another potential Greek crisis.
Next Wednesday the European Court of Justice will rule on the challenge to the ECB’s OMT programme brought by a group of German activists and politicians.
Quantitative easing
The outcome could have implications not only for OMT – a bond-buying programme aimed at bailout countries that has never been used – but on the legality of the ECB’s plans for a more wide-ranging quantitative easing, or bond-buying, programme.
Just over a week later – three days before the Greek election – the ECB meets in Frankfurt for its monthly rate-setting meeting, amid growing speculation that the central bank could announce a bond- buying programme.
Frankfurt has been gradually introducing various non-conventional measures to stimulate the euro zone economy, such as the covered bond and asset-backed securities purchase programme, and the most recent injection of cheap financing for banks known as LTRO (long-term refinancing operation).
But the ECB has long been criticised for refraining from the kind of full-scale quantitative easing adopted by other central banks. ECB president Mario Draghi has indicated for some months that quantitative easing is on the cards, despite German concerns that bond- buying comes dangerously close to financing governments, which EU treaties ban.
As Greece totters on the brink of another sovereign debt crisis, the euro zone’s poor economic performance may bolster the ECB’s case to act.
Deflation could provide a cover for the ECB to engage in bond-buying. Given the ECB’s mandate to control inflation, German sceptics will find it hard to contest that bond purchases are necessary.
While a bond-buying programme may not deal with the disputed issue of debt write-downs for Greece, it may ease Greece’s dangerous passage through the final months of its bailout programme, which is now tantalisingly close to an end.
By stepping into the market, perhaps together with a precautionary credit line, the ECB could provide support to Greece, regardless of who ends up in government.
Having adhered to brutal austerity demands over the last number of years, the Greek public are quite right to expect that it is now the turn of the ECB to step up to the plate and intervene.