After a weekend of intense haggling, sharp public statements, and hope trading places with despair every other hour or so, Greece is set for its first coalition government in 22 years. Last night, a little after ten o'clock, the office of the president of the republic released a short statement announcing that Prime Minister George Papandreou, leader of the left-wing PASOK Party, and the leader of the conservative opposition party, the Nea Demokratia, Antonis Samaras, had agreed to form a new, interim government with the purpose of implementing the bailout agreement reached at the October 26 European Union Summit. Afterward, the country will hold new elections. The statement noted that Papandreou will not lead the new government and that he and Samaras will communicate on Monday to decide on the person who will.
At the time of this writing, the likeliest candidate for the post was Loukas Papademos, former governor of the Bank of Greece and former deputy head of the European Central Bank (ECB) between 2002 and 2010. Papademos, 64, with a doctorate in Economics from the Massachusetts Institute of Technology, has spent his time since leaving the ECB teaching public policy at Harvard's Kennedy School of Government and acting as an unpaid economic adviser to Papandreou. In terms of credentials, he is probably the country's best bet in its uphill struggle, in the coming months, to restore its tattered credibility in the eyes of its European partners.
He is not guaranteed to succeed. The fact that he has never been politically active is a plus, since it makes both PASOK and Nea Demokratia comfortable with him at the helm -- he has no track record. But his lack of political experience means he will be at a disadvantage as he tries to negotiate with his counterparts in other European countries and navigate the even more treacherous tides of a Greek political scene. In June, during an earlier period of political turmoil, he was offered the post of finance minister, but he rejected it, apparently because he did not want to participate in a single-party government. A solid banker-professor who will make the Germans feel relaxed when they see him at the shop window, Papademos must nonetheless defend himself against efforts by the two major parties to reduce him to the role of a figurehead.
The magnitude of the task facing the new coalition government underscores the difficulty facing the new prime minister, whether it is Papademos or not. It is expected to last not more than four or five months (February 19 has been tentatively agreed as a date for new elections), but in that time, the new prime minister must secure the release of the sixth tranche of the original troika loan to Greece -- 8 billion euros, without which the country runs out of money in about a month; it must submit and pass the 2012 budget before the end of the calendar year; and most crucially, it must negotiate an outline of fiscal- and structural-reform targets that come with the new loan agreement agreed to on October 26 and 27. It must also bargain with the International Institute of Finance (IIF), the global banking lobby group, about the terms and the extent of its participation in the 50 percent haircut of the Greek bonds its members hold, and take the necessary measures to bail out the Greek banks and pension funds whose finances will buckle under the strain of the haircut.
Current Prime Minister Papandreou got his outgoing cabinet's support yesterday to secure the first tranche of the new loan -- 20 billion euros -- before it exits the stage. All this, of course, is without mentioning the grave implementation issues that the new cabinet will face -- tax collection, privatization, cuts to public-sector payrolls and environment protection -- and the many crises that may erupt because of anger and unrest in Greek society.
Papandreou's decision last Monday to call for a referendum, essentially on Greece's membership of the euro, was a terrible miscalculation. It turned a subject that was only discussed by officials behind closed doors or by newspapers into a central topic of conversation between the leaders of the Eurozone and beyond. The fact that Papandreou had not consulted with European leaders before making his decision threatened to create inexorable momentum for a Greek exit from the euro. It was followed by a week of political insanity.
This catastrophic prospect of leaving the euro thankfully slapped some sense into politicians. The prime minister and Samaras, who had been schoolmates in Athens and roommates in university in the U.S. but whose relationship had deteriorated in recent months, were able to step back from the brink. Papandreou, under pressure from his own parliamentary party and his cabinet, withdrew plans for a referendum and declared his willingness to stand aside in favor of a new coalition government. Samaras withdrew his initial, unrealistic conditions to support such a government -- that it last only 6 weeks and be made up exclusively of unelected technocrats.
According to the latest information, if Papademos becomes the new prime minister, he will be flanked by two deputy prime ministers: Evangelos Venizelos from PASOK, who will continue as finance minister; and Stavros Dimas, a respected former European Union environment commissioner who is currently a deputy head of Nea Demokratia. Otherwise, there will be an attempt to limit the extent of the reshuffle to prevent delays in the implementation of critical reforms.
The task ahead is monumental. Greeks, who have spent two years seeing their standard of living undercut and being maligned across Europe as lazy and corrupt, and who were disgusted by the humiliating treatment dished out to Papandreou in Cannes by Merkel and Sarkozy, are at the limit of their patience. Europeans are growing accustomed to the idea that Greece will not be able to make it and are seriously preparing for a possible Greek exit from the euro. The new coalition government has its work cut out for it.