Will Round Two Knock Out Greece?

Consistent in its suicidal tendencies, the Greek political system failed this week to come to an agreement on forming a coalition government. The leaders of Greece’s political parties—as we know from the published minutes of the meetings with the President of the Republic—showed themselves, with one or two dignified exceptions, tragically unable to rise to the occasion. New elections have now been called. The outcome on June 17, or even the mounting uncertainty of the pre-election period itself, could spell the end of Greece’s membership of the euro.

Two factors determined the inability to form a government after the May 6 election. The first was the sharp rebuke to the two (formerly) major parties, New Democracy and PASOK, who lost nearly 60 percent of their combined voting share and were thus, even in tandem, two seats short of an absolute majority in parliament. The second was the unwillingness of the parties of the non-communist Left—SYRIZA and the Democratic Left—to enter into a coalition.

Of these parties, most attention has focused on SYRIZA, a coalition of forces ranging from the moderate to the extreme Left, which came in a shockingly close second with nearly 17 percent of the vote. The central message of SYRIZA’s pre-election campaign was the rejection of the terms of Greece’s bailouts. It has called for unilaterally writing off most of Greece’s public debt, has opposed wage and pension cuts, all forms of privatization (in fact it has called for the nationalization of major enterprises and banks), and has stood against the liberalization of the country’s closed professions.

Alexis Tsipras, the 37-year old former student radical who leads the party, was pressed on all sides to join a coalition that would seek to renegotiate the loan agreement so as to relax its terms and allow some breathing space to the free-falling Greek economy.  Predictably, he refused, seeing no reason to injure himself by associating with PASOK and New Democracy and with the hard decisions of governing. It was clear from the discussions in the presidential palace and from his public statements that his aim was to lead the country to another election, in the hope of further strengthening his position. It is a strategy seemingly validated by the first batch of post-election polls—even if catastrophic for the country.

The pressure on SYRIZA came not only from New Democracy and PASOK, but also from Fotis Kouvelis, leader of the Democratic Left, a party formed during the previous parliament from the more moderate elements of SYRIZA. Kouvelis has always emphasized Greece’s membership of the euro as a top priority, despite also being against many aspects of the second bailout. His party controlled 19 seats after the election, so the numbers were there for the formation of a coalition government with New Democracy and PASOK. But he insisted, to the bitter end, that he would not support a coalition without the participation of SYRIZA. Evangelos Venizelos, the boss of the center-left PASOK, was also determined to bring Tsipras inside the governing tent. The reasons are obvious: both PASOK and the Democratic Left feared that if they remained in government, and SYRIZA continued to rail against hated austerity, from the raised platform of the official opposition no less, their parties would be on a fast-track to electoral oblivion.

Greek politicians now find themselves in a new pre-election period, in conditions of heightened, dangerous uncertainty. Talk is again rife—and becoming increasingly specific—about a Greek exit from the eurozone and what its consequences would be. This discussion is pushing up bond spreads in Spain and Italy and complicating negotiations between the new French president Francois Hollande and the German chancellor about the reorientation—which even Angela Merkel now seems to accept the need for—away from austerity and towards growth and employment stimulation.

Most urgently, it has provoked what is referred to by analysts as a “bank jog” on Greek banks by nervous depositors, who are increasingly afraid that their savings will be turned overnight into massively devalued drachmas. If the “jog” turns into a run and the ECB does not take the necessary measures to provide liquidity, Greece’s position within the euro will become untenable, forcing the country to leave the currency, print new money, and impose capital controls in order to keep the banking system from totally collapsing.

This downward spiral is reinforced by inflammatory proposals by SYRIZA, like the 75 percent tax on all income exceeding 500,000 euros and a 1 percent tax on turnover regardless of whether the firm in question is profitable and compulsory loans by depositors to the state. It is also reinforced by provocative statements from European officials, above all by German Finance Minister Wolfgang Schauble, who see no trouble with existing Greek economic policies—despite the 22 percent unemployment rate, which jumps to 53 percent for young adults.

Voices of reason may still prevail. Merkel, unlike her incendiary finance minister, recently spoke about her determination to keep Greece in the eurozone and declared herself “open” to a stimulus program to help revive growth in the depression-plagued country. Under pressure from Tsipras, and more so from the deteriorating situation in Spain and the anti-austerity mandate of Francois Hollande, Europe will offer the Greek government carrots (in the form of European investment programs and more relaxed deficit targets) as well as sticks.

It is still realistic to expect this could be the outcome of the latest bout of political paralysis and financial market mayhem. But the scenario of disorderly default and a Greek exit from the euro has also gained an unprecedented level of credibility in the last few days.

Comments

I think Merkel's ambiguity is just making things worse. Either Germany is going to bail out Greece, and keep on doing it indefinitely, or it isn't. How are the Greeks supposed to make a decision one way or the other until they know what Germany is going to do?

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