For years political observers have warned of the risk that Europes debt crisis and austerity policies could foster the rise of extremists. That risk has now arrived with the sweeping victory of the left-wing Syriza party in Greeces parliamentary election.
Syrizas charismatic leader, Alexis Tsipras, routed the countrys political establishment the center-left Panhellenic Socialist Movement and the center-right New Democracy by promising to end the austerity policies that the European Union and the International Monetary Fund have imposed in return for a 240 billion ($270 billion) bailout. Under those policies, the Greek economy has shrunk by a quarter and unemployment has surged to 28 percent.
By demanding fresh debt relief and a relaxation of fiscal policy, Tsipras has put Greece on a collision course with EU orthodoxy and its enforcer, Germany. The Greek leader is gambling that Berlin will give in rather than risk the chaos that a Greek exit from the euro area could trigger. Chancellor Angela Merkel knows that Greece needs fresh money or debt relief by this summer, at the latest, to avert default. Both sides are playing very high-stakes poker.
EU policymakers can point to some success stories. Ireland and Spain implemented wide-ranging reforms, exited their bailouts and restored growth. The cost has been great, though: Living standards have fallen sharply in both countries, and output in the 19-nation euro area remains lower today than before the crisis.
Many EU countries, including France and Italy, have plenty of work to do to make their economies more competitive. But Europe needs carrots as well as sticks if it is to turn its economy around and preserve the euro. Brussels has drafted plans for major infrastructure projects; several governments, including Germany, have the fiscal leeway to boost spending modestly. With its new bond-buying program, the European Central Bank has given politicians a supportive monetary backdrop for taking tough policy decisions.
We can make it cheaper to invest, ECB executive board member Benoît Coeuré told attendees at the recent World Economic Forum in Davos, Switzerland. But people have to want to invest. Thats the job of finance ministers.
The euro was always a political project at heart. Its fitting that Greece, the cradle of democracy, has sent a reminder that without popular support the single currency risks tearing the union apart rather than binding it ever closer. Europes political leaders need to demonstrate that the euro deserves that support or face the consequences.