What’s next for Greece?

“The costliest minor government reshuffle in Greece’s history.” That is at least one way to describe the result of the Greek general election on September 20. Indeed, with few exceptions, the same ministers have returned to the same offices as part of an administration backed by the same odd pair of parties (the left-wing Syriza and the smaller right-wing Independent Greeks), which received only a slightly lower share of the vote than the previous administration.

But the appearance of continuity is misleading. While the percentage of voters backing the government is relatively unchanged, 1.6 million of the 6.1 million Greeks who voted in the July 5 referendum on continued “extend-and-pretend” loans with stringent austerity strings attached did not turn out. The loss of so many voters in little more than two months reflects the electorate’s dramatic change in mood – from passionate to glum.

The shift reflects the mandate that Prime Minister Alexis Tsipras sought and gained. Last January, when I stood with him, we asked voters to back our determination to end the “extend-and-pretend” bailouts that had pushed Greece into a black hole and operated as the template for austerity policies across Europe. The government that was returned on September 20 has the opposite mandate: to implement an “extend-and-pretend” bailout program – indeed, the most toxic variant ever.

The new Tsipras administration knows this. Tsipras understands that his government is skating on the thin ice of a fiscal program that cannot succeed and a reform agenda that his ministers loathe. While voters wisely prefer that he and his cabinet, rather than the conservative opposition, implement a program that an overwhelming majority of Greeks detest, the reality of the austerity agenda will test public patience.

The Tsipras government is committed to enacting a long list of recessionary measures. Three highlight the tax avalanche that awaits: More than 600,000 farmers will be asked to pay additional back taxes for 2014 and to pre-pay over 50% of next year’s estimated tax. Some 700,000 small businesses (including low-wage workers who are forced to operate as private service providers) will have to pre-pay 100% (yes, you read that right) of next year’s taxes. As of next year, every merchant will face a 26% turnover tax from the first euro they earn – while being required to pre-pay in 2016 a full 75% of their 2017 taxes.

In addition to these ludicrous tax hikes (which also include substantial increases in sales taxes), the Tsipras government has agreed to pension cutbacks and fire sales of public assets. Even most reform-minded Greeks balk at the agenda imposed by the “troika” (the European Commission, the International Monetary Fund, and the European Central Bank).

Tsipras is attempting to erect two lines of defense against the coming tsunami of pain (and thereby minimize popular discontent). The first line is to press the troika to make good on its promise to enter into debt-relief negotiations once its recessionary agenda has been fully implemented. The second line of defense is based on the promise of a “parallel” agenda aimed at ameliorating the worst effects of the troika program. But both lines are porous, at best, given the harsh realities of Greece’s economic circumstances.

There is little doubt that the Greek government will gain some debt relief. An unpayable debt is, one way or another, a haircut. But Greece’s creditors have already had two haircuts, first in the spring of 2012, and another that December. Alas, those haircuts, while substantial, were too little, too late, and too toxic in terms of their financial and legal parameters.

The question facing the Tsipras government is thus whether the next haircut will be more therapeutic than the last. To help the Greek economy heal, debt relief must be both sizeable and a lever for eliminating most of the new austerity measures, which merely guarantee another spin of the debt-deflation cycle. More precisely, debt reduction must be accompanied by a reduction in the target for the medium-term primary budget surplus, from the current 3.5% of GDP to no more than 1.5%. Nothing else can allow the Greek economy to recover.

Is anything like this politically possible? One clue recently emerged in an article in the Financial Times in which Klaus Regling, the head of Europe’s bailout fund, the European Stability Mechanism, returned to the troika’s mantra that Greece does not need substantial debt relief. Regling may not be a major player in his own right, but he never speaks out of turn or contradicts the ECB and the German government.

Of course, there is the IMF, whose staff tell anyone willing to listen that Greek debt must be cut by approximately one-third, or €100 billion ($112 billion). But if the recent past is any guide to the near future, the IMF’s views will be trumped.

This leaves Tsipras with only his second line of defense: the “parallel” program. The idea here is to demonstrate to the electorate that the government can combine capitulation to the troika with its own agenda of reforms, comprising efficiency gains and an assault on the oligarchy that may liberate funds for the purpose of lessening austerity’s impact on weaker Greeks.

This is a worthy project. If the government can pull it off, it is a potential game changer.

To succeed, however, the government will have to slay two dragons at once: The incompetence of Greece’s public administration and the inexhaustible resourcefulness of an oligarchy that knows how to defend itself – including by forging strong alliances with the troika.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Yanis Varoufakis  is a member of parliament for Syriza and Professor of Economics at the University of Athens.

Image: A Greek national flag flutters as tourists visit the Acropolis hill. REUTERS/Alkis Konstantinidis.