Greece elects the attack-dog

Before Greece's election last Sunday, the consensus was that Syriza's bark would prove worse than its bite. The left-wing populist party campaigned on debt relief for Greece and an end to EU-mandated austerity and reforms, but most commentators assumed they would need to take a more conciliatory stance to form a coalition. Yet the consensus has been wrong, says James Forsyth on spectator.co.uk.

Syriza fell only marginally short of an absolute majority, and has formed a coalition with a small centre-right group whose approach to Greece's creditors is just as uncompromising.The creditors, led by Germany, are reluctant to keep lending Athens money if it won't make reforms and balance its budget.

"Caving in to Syriza's demands would come at a high political cost," as the FT points out. It would embolden eurosceptic parties in the north of Europe and populist parties in the troubled south, where the clamour for similar debt write-downs would grow. Potential subsequent debt defaults across the European periphery would rattle markets and could raise the risk of another financial crisis.

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This week the incoming Greek finance minister was reported to have said that "whatever the Germans say, in the end they will pay". He clearly believes that Germany's leaders are bluffing when they say they are no longer rattled by the prospect of a Greek exit. The continent's banks are stronger and a Europe-wide bail-out fund is in place, while the European Central Bank's quantitative easing would calm the markets.

But, as Hugo Dixon notes on reuters.com, a "Grexit" would still be "a huge political failure", and contagion cannot be ruled out. A Greek departure "would be such a unique event that nobody really knows where the chain reaction would lead".

So what next? The upshot looks set tobe an extension of the maturities on Greece's debt, along with a reduction in the interest rates on it, in return for Greece's commitment to further reforms. Syriza has at least promised to clamp down on tax evasion, a key weakness in Greece.

Linking debt repayments to levels of Greek GDP would also make the massive Greek debt pile affordable.Yet arriving at this compromise is likely to take time. That means that months of uncertainty, which will undermine the continent's frail economy further, are on the cards. The latest chapter in the multi-year euro crisis has begun.