The changing dynamics of Greece's Crisis

Shifting from Financial to Political

By Stratfor

Summary

The European financial crisis centered for several years on the idea of preventing Greece from defaulting on its national debt. However, the rest of Europe has had time to prepare itself for any potential fallout from a Greek default. This is changing the dynamic between Greece and Europe even as emerging societal trends within Greece are illustrating changes in the relationship between Greece's political elite and its people. These trends will continue as the crisis transforms from a financial one to a political one.

Analysis

Since the beginning of the financial crisis in 2008, European leaders' actions have been dictated by a presumed need to keep Greece from defaulting on its massive national debt at all costs. Even at the cost of losing domestic popularity for supporting a Greek bailout, and even if Greece seemed unwilling or unable to repay the money Europe poured into it, European politicians prioritized the prevention of a Greek default in order to prevent the euro -- and possibly the European Union -- from collapsing. However, that could now be changing, along with the relationships between Greece and the rest of Europe and between Greece's political elite and the Greek people.

When Greece received its first bailout package in 2010, the prospect of a Greek default and financial contagion created a dynamic similar to mutually assured destruction between Greece and the rest of Europe. If Europe did not continue to pay, Greece would go bankrupt, and if Athens defaulted on its debt, many other European countries likely would do the same. However, without notable reform efforts in Greece -- or at least the show of an effort -- the continuing bailout would be politically unacceptable in the rest of Europe. This led to a back-and-forth between Greece and Europe -- Greece fails to meet its reform commitments and Europe withholds funds and demands more austerity measures; Greece attempts to enact more austerity, but just as it appears on the verge of default, European funding resumes and prevents disaster. After two years, however, this balance could be shifting.

Europe has had time to sequester potentially bad Greek debt and build up institutional defenses against contagion, buffering itself from the aftermath of a Greek default. It is hard to find exact figures describing how much European entities have decreased their exposure to the estimated 350 billion euros (about $469 billion) of Greek private and public debt, but the European Central Bank has taken unprecedented steps in the last couple of years to reduce the threat. After three years of difficult reforms, the Greek situation has only worsened. Greece is entering its fifth year of recession with approximately 25 percent unemployment. The benefits of avoiding default and remaining within the eurozone are becoming less obvious to the average Greek, as are the long-term benefits of increased austerity. Once-taboo discussions of a Greek default are becoming more prominent in Greece and elsewhere in Europe.

Stratfor's assessment of the European financial crisis is that it is political in nature, not economic. The European financial condition will deteriorate, and the disparity of social and economic conditions among EU member states will combine with a (perceived or actual) loss of national sovereignty, aggravating nationalist sentiment, bringing more radical ideologies to the mainstream and ultimately leading to a fundamental break in the system brought about by political, not economic, differences.

Before this, we would expect to see certain societal shifts occur in individual European countries. Such a shift appears to be starting in Greece, where Stratfor has noted several anomalous events recently: violence at social protests, increasing support of alternative political ideologies and a diminishing presence of the more moderating societal elements as more people leave urban areas or emigrate in search of employment. These events could signal the transformation from a primarily financial to a primarily political crisis within Greece, a trend likely to spread throughout Europe.

Greece's Evolving Protests

The first recent anomalous event inside Greece was the violence that broke out during mass demonstrations in Athens ahead of the Feb. 12 parliamentary approval of the most recent austerity package. The country has been in a nearly continuous state of protest for two years over austerity measures, and this was the first time that a relatively small number of protesters turned an organized demonstration to violence. By the time the incident had ended, some 48 buildings in Athens had been set on fire; 150 businesses had been looted; 100 people, including 68 police officers, had been wounded; and 130 people had been detained. Similar but more contained riots occurred the following Saturday before the parliament approved another 325 million euros in budget cuts.

Athens has passed at least five major austerity packages in the last two years, so the Feb. 12 parliamentary vote was not particularly drastic. Furthermore, although the protest the weekend of Feb. 11-12, with an estimated 80,000 demonstrators, was one of the larger recent demonstrations, it was smaller than the 100,000- to 120,000-person protests of similar austerity measures in June and July 2011. Still, despite the frequency and size of the protests, violence has been rare and had not risen above the level of small-scale clashes between small numbers of protesters and police. Peaceful demonstrators have been known to restrain or retaliate against the masked or hooded rioters, who are in the minority and are more interested in fomenting chaos than having their grievances redressed. If violent incidents like the one that occurred Feb. 12 continue, it would suggest a fundamental shift in the nature of social unrest in Greece.

The Rise of the Far Left

The current Greek government, consisting of the conservative New Democracy (ND) party, the Panhellenic Socialist Movement (PASOK) and the much smaller far-right Popular Orthodox Rally, was only intended to last long enough to pass the unpopular reforms needed to secure a second bailout for Greece and the approval of the European Union and the International Monetary Fund (IMF). With that done, Greece has announced its intention to hold general elections in April. This is the context for the second anomaly within Greece: the growth in support for peripheral far-left parties.

Historically, ND and PASOK have dominated the Greek political scene, alternating power over the past several decades. During Greece's last general elections, in 2009, the two parties combined represented 77 percent of the total vote, a testament to the relatively limited influence of smaller, more radical parties. In recent weeks, ND public condemnation of further austerity measures fueled a dramatic rise in the party's support, which reached as high as 30 percent. Prior to the Feb. 12 parliamentary vote, ND seemed well positioned for Greece's next elections.

However, just days after ND and PASOK voted to approve the latest austerity package, both parties saw their standings in public polls drop to an all-time low, with ND's standings reaching 19 percent in some polls -- a more than 10 percent drop from its popularity before the vote. The same polls showed that three far-left parties, combined, are polling at around 37 percent, compared to the mainstream ND and PASOK's combined approval rate of 32 percent. All three leftist parties opposed the current terms of Greece's bailout -- Communist Party of Greece leader Aleka Papariga went so far as to declare unilateral default as the only way forward for Greece.

For as long as avoiding default has been Greece's primary imperative, Greek politicians -- regardless of ideology -- have had little choice but to pass whatever additional austerity measures the European Union and the IMF demanded. Now, as a Greek default presents less of a threat to Europe, Greek politicians will lose the support -- and interest -- of European powers that has allowed them to override domestic political and social will. Further, as Greeks tire of their situation, alternative solutions such as default will be considered less radical and will become more popularly accepted. The influence of Greece's mainstream politicians, who have been cooperating with Europe to avoid default, could be waning both within Greece and throughout Europe.

Greece's Population Shifts

Along with violence at protests and the increasing popularity of Greek far-left political parties, a relocation of Greek population segments is contributing to the emerging societal shift in Greece. The moderating elements of Greek society are leaving Athens and other major cities, and some are leaving the country entirely. Current internal migration and emigration statistics for Greece are difficult to find, but there is plenty of anecdotal evidence to suggest that people are leaving the cities or the country at an increasingly rapid rate. Greece has a strong tradition of both internal migration and emigration in times of economic hardship.

Most Greeks who are able send their children abroad to study. Given that the unemployment rate for people under age 25 in Greece is nearly 50 percent, it appears few young people are returning from abroad. In September 2011, organizers of a government-sponsored program on emigration to Australia, a program that reportedly attracted only 42 people in 2010, were overwhelmed when more than 12,000 people signed up to attend.

Those who cannot leave the country are beginning to reverse the mass urbanization that occurred in major Greek cities over the past couple of decades. Greece's population is approximately 11 million -- the population of Athens alone is just more than 4 million. According to the Greek farmers union, between 2008 and 2010 -- even before austerity reforms began taking effect -- about 38,000 members of the business community in the country lost or quit their jobs in the city and returned to the country to farm. Most Greeks who left the countryside for the city still have ties to family and land in their home villages.

After four years of recession with no foreseeable end and a government increasingly losing control over the country's future, the Greeks who remain in the cities are those whose options for improving their own situations are limited and who see themselves -- and Greece -- as having diminishing control over their circumstances. As the moderate segments of society leave the cities, they create more space for extremist viewpoints to come to the forefront. This, combined with Greece's other emerging domestic shifts and the fundamental changes occurring in Greece's relationship with Europe, is turning a crisis that once centered on the Greek financial situation into a political crisis between both Greece and Europe and between the Greek government and its people.

Greece is unique among European countries for many reasons, and the evolution of the crisis in Greece will be unique as well. Nonetheless, it serves as a good case study in what could develop elsewhere across Europe. Stratfor will be watching for the trends emerging in Greece -- social protests giving way to violence, the increasing popularity of extremist political views, reverse urbanization and increasingly rapid emigration -- to surface in other countries as the center of Europe's crisis moves away from the financial realm and into the political arena.