Euro In or Euro Out?
A wave of relief greeted overseas markets last night after Greece’s second round election results came in. New Democracy (a pro-bailout party) won approximately 30% of the vote, narrowly defeating Syriza (anti-bailout) with 27%. Initial sentiment favored the stability of the European Union and the Euro as its currency.
Optimism quickly faded as more practical concerns returned, and rightly so.
This election was never really a referendum on the Euro. In reality most of Greece’s major parties don’t favor a break with Europe’s currency union except for the Communist (KKE) which won a mere 12 out of 300 seats (4%), down from their previous 26 seats in the May elections. Had the anti-bailout crowd won the day Greece may have drifted into a de facto exit (no funds from Europe, government goes bust, hello Drachma). But that risk still remains if real reform doesn’t breath life into the rapidly deteriorating economy – no easy task with the raft of obstacles to be negotiated in such a short period of time.
First there needs to be some semblance of political stability. New Democracy still needs to form a coalition government to get anything done. They will likely turn to the Socialist (PASOK) party which wants to alter the terms, but not reject outright, the bailout plan. Significant government budget cuts and lowering debt (aka austerity) are the preconditions for loans to stabilize government finances.
Once the new Greek government forms they must still agree on a unified negotiating stance regarding the bailout. Europe must concur, then at least some of the reforms have to be implemented before the money will start to flow. Of course there must be some short-term benefits or any coalition will falter, but the temptation to follow well worn paths of stagnation will be difficult to avoid – pouring new found funds into leaky political buckets for example. Even still, new job creation doesn’t happen overnight and economies are more like ocean liners than speed boats trying to change direction (though to stretch the analogy it may be easier once the engines have slowed, but not stalled completely).
Unfortunately none of the current political wrangling addresses Greece’s core problems – high unemployment, corruption, inefficiency and year’s of rising labor costs without gains in productivity that have crippled the country’s competitiveness.
Too much indiscriminate budget cutting could very easily send Greece into depression, political paralysis, and continued social unrest (clearly not the path that increases middle class job growth, investment, and business creation). More stimulus won’t do the trick either if it follows the tried and failed policies of the past – wasteful government spending and bloated bureaucracies that don’t add real and lasting value.
Greece’s mess remains largely self imposed and the solutions, though daunting, are well within reach. Political unity however may be harder to sustain than agreement on lofty job creating plans and policies. Markets remain wary because Greece’s election hasn’t solved the country’s key problems. Greece isn’t even the worst of Europe’s difficulties. The much larger economies of Spain and Italy continue flirting with disaster and France remains on unstable ground. More volatility in the weeks and months to come reflect the current economic reality that is Europe far more than debates over whether the Euro or the Drachma will keep the lights on.
Photo: Parthenon, public domain.