Sunday’s national election was supposed to be a major turning point for the future of the euro. The fear in financial markets was that a government led by a party with a radical approach to the country’s three-year debt crisis would take power, or that no stable coalition would form at all, setting in motion a chain of events that would end in Greece’s exit from the euro zone and inevitable chaos.
First, the good news. The outcome of Greece’s election was probably the best possible one for the euro. Rather than a clear “antibailout” party, like Syriza, winning the election, the “probailout” New Democracy party garnered the largest number of votes, and now its chief, Antonis Samaras, is attempting to cobble together a ruling coalition. Assuming he achieves that task on Wednesday, the election result will likely quash worries of an immediate Greek exit, or Grexit, as it is being called.
Now, the bad news. The importance of this election was overblown. Sure, we might have dodged the most dangerous bullet. But the reality is that the overall situation, for Greece and the euro zone, has not improved, let alone changed much. We are no closer to a resolution of the crisis than we were before. In fact, we may be even further away.
Why is that? First of all, whichever party leads the next government, Greece will be thrown into a renewed period of uncertainty. Though Samaras has pledged to keep Greece in the monetary union, he has also vowed to renegotiate the terms of the latest E.U.-backed bailout. That means Greece and its E.U. creditors, led by Germany, will have to arm-wrestle through yet another round of negotiations on a package of reforms and rescue funds. In that way, a New Democracy–led coalition would be different only in tone rather than substance from a more radical Syriza government. This election was always going to result in a reopening of the Greek bailout pact and thus continued confusion about Greece’s membership in the euro zone.
That’s because Greece’s creditors are highly unlikely to make many concessions to Athens, no matter who is running the government. With policymakers in Berlin and elsewhere short on patience with Greece right now, I can’t see them overhauling the current bailout arrangement in significant ways, especially in regard to the biting austerity measures that are the main source of controversy in Greek politics. So that will ultimately leave the new, postelection government in Athens in the same position as the pre-election administration — having to implement a painful series of unpopular reforms to keep the bailout money flowing and avoid bankruptcy.
Yet throughout Greece’s crisis, the politicians in Athens have been completely unable to deliver on their reform pledges. Will the incoming government do a better job? We have no reason to believe it will. In fact, reform could well be more difficult. Whatever coalition comes into power, it will likely be fractious and unstable — not the sort of leadership capable of pounding through unpopular reforms. And then there will be a large block of votes in Parliament, led by Syriza, that will fight against further German-mandated austerity measures.
In other words, the global economy is facing the same uncertainty about the future of Greece postelection as pre-election. Will Greece be able to implement sufficient reform to keep Berlin happy and avoid an unruly Grexit? That question will still be hanging over the euro-zone debt crisis for months to come. As before, the bailout agreement could break down at any time. Research firm Capital Economics put it this way in a June 19 report: “While the result of Sunday’s election is probably the best realistic outcome that could have been hoped for, we are not minded to alter our central view that Greece could exit the euro zone by the end of this year.”
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Another reason why the Greek election doesn’t matter much is that Greece itself is becoming something of a sideshow in the crisis facing the euro. The real action is farther west, mainly in Spain, but also in Italy. It is telling that in the days after the vote in Athens, Spain’s borrowing costs shot up over 7% — the level at which many analysts believe a country could be forced into a bailout. Borrowing costs for Italy have been rising as well, while Prime Minister Mario Monti’s reform program has been stalled by domestic politics. A Grexit would be destabilizing, but it may not on its own be able to unravel the entire monetary union. Giants Spain and Italy are much more of a threat to the euro’s future.
And so far, the leaders of the euro zone have not devised a credible response to the deteriorating situation in Spain. The proposed $125 billion bailout for Spain’s banks has also generated worries that more will be needed to bail out the Spanish state — resources the euro zone either may not have on hand or be willing to commit. We’ll have to see what happens at the next European summit later this month. But with the degree of dissension among the major players — Berlin, Paris, Rome and Madrid — apparently widening, we can’t assume that meeting will produce a firm policy response to the deepening crisis.
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