Posted on June 17, 2012

Greek Fallout

Greeks voted Sunday for the second time in six weeks in what was arguably their country’s most critical election in 40 years. Voters are deciding whether to support parties that back a bailout by other Eurozone nations, or to elect those who purportedly want Greece to go back to its former currency, the drachma.

Right now (Sunday afternoon), results suggest the pro-Eurozone New Democracy party has taken the lead. The Financial Times reports that, “According to interior ministry projections, New Democracy was set to take 29.5% of the vote and 128 seats in the 300-member parliament, compared with 27.1% and 72 seats for Syriza”.

While this is reassuring, the strong performance of Syriza—the Party that promised to cancel the country’s international bailout agreements and accompanying austerity measures—remains very troubling. Moreover, any government formed by New Democracy and its likely coalition partners will certainly push for easing in the austerity measures as well.

With the hold back of €1 billion from the most recent rescue package, the Greek government will run out of money to pay public sector workers in just over a month. Germany and others insisted on the hold back following the inconclusive elections on May 6 where no party won enough votes to form a government and coalition talks collapsed after 10 days. That vote sent a very clear signal that Greeks are fed up with the deep spending cuts on everything from health care to education and infrastructure, as well as tax hikes and reductions in salaries and pensions imposed in return for the rescue loans. Greece is in its fifth year of recession, with unemployment spiraling above 22% and tens of thousands of businesses shutting down.

The risk of a Greek exit from the Eurozone remains as newly elected French President Francois Hollande warned last week that if Greeks move away from their commitments, there will be countries in the Eurozone that will want them to leave. This hard-line political rhetoric is very dangerous. There has already been a run on Greek banks—as an estimated €700 billion have been withdrawn—and Spanish bank withdrawals have increased sharply. A wider-spread banking run could ignite an all-out crisis. Fears are realistic that tomorrow’s G-20 meeting in Mexico will bear no fruit other than another wishy-washy statement about austerity and cooperation. The weakening global economy has for years been held hostage to political brinksmanship, both in Europe and the U.S. Financial markets are reeling, putting further downward pressure on consumer and business confidence.

Bottom Line: Any solace the markets take from the Greek election results is likely to be short lived. Until Germany is willing to foot the bill for much of the Eurozone restructuring and acknowledge that monetary union implies further integration towards a fiscal, political and banking union, the crisis will continue. The EU was created to prevent a recurrence of the German-led political and economic disasters of the 1930s and ‘40s. Germans in the decade after WW II were willing to help with the costs of rebuilding Europe for the longer-term benefit of gaining their trust and establishing a stronger union. Many now have forgotten this impetus for the EU; but Germany has arguably gained the most from the monetary union with a currency far weaker than what the deutsche mark would have been. Germany has become an export powerhouse and 40% of its exports go to the Eurozone. Germany cannot afford to let the Eurozone slide into further crisis.