Making sense of what comes next in Greece
Analysts are scrambling to interpret the voting results from Greece’s first election since the crisis began in late 2009, hoping to accurately gauge the political risk that a new parliament in Greece will successfully (and meaningfully) renegotiate the previous austerity accords. At stake is the ongoing debt-financing support from the International Monetary Fund, European Commission and European Central Bank. Already the triumvirate has warned that it will not follow through on the next loan disbursement unless the new Greek government also follows through in detailing next month how it will achieve budgetary savings of more than 11 billion euros for 2013 and 2014.
Here are a few important guideposts to keep in mind as the news out of Greece develops over the next few weeks.
1. Another election is likely, which means general fears about fresh instability will remain elevated over the next month. The two major political parties (Conservative New Democracy and Socialist Pasok) that endorsed the austerity pacts over the last few years lost big in the election. Combined, a bunch of smaller, and in some cases fringe, political groups (including the Neo-Nazi Golden Dawn party) won more than 60 percent of the popular vote. In all, Sunday’s results left Greece with its most fragmented parliament since democracy was restored in the country back in the 1970s. The consensus view is that it will be difficult, if not impossible, for these diverse factions to form a coalition government. If that happens, a new “do-over” election will have to take place, though probably not before the middle of June.
2. The debate around Greece, and specifically whether it will exit the euro, is about to get louder. By some estimates, almost three-quarters of the Greek population wants to keep the euro. Ironically, this most recent election in Greece was not really framed for voters as a binary choice between either abandoning austerity or maintaining the euro. Parties on both the left and right chose instead to emphasize that they represented fresh leadership alternatives that could still deliver win-win fiscal policy solutions (i.e., avoiding much of the scheduled pain from austerity). In many respects, the best way to characterize the election results at this stage is that votes were cast not for specific new policies (with a full appreciation of the consequences) but more out of general frustration with the incumbent parties. Corruption and other party-specific (rather than policy-specific) factors loomed large as well. Expect the commentariat to examine this tension within public opinion, which may help clarify whether holding on to the euro while avoiding all near-term austerity is an untenable position.
3. The election results appear to have been driven by younger, not older, voters. Overall, it appears that voter turnout was low (exactly how low is unclear). Younger voters were the most energized. Older voters, who probably have the most to lose from a disorderly exit from the euro, did not turn out. In part, this dynamic looks as if it helped fuel the rise of third- or fourth-tier parties. A lot of the post-election attention is appropriately focused on Alexis Tsipras, the 38-year-old politician who ushered his Syriza party to a second-place finish behind the New Democracy Party. Syriza got a big boost from younger voters in this election, and many analysts believe that will pay off in any future election. If – or, more likely, when – there is another election next month, a key trend to watch will be whether there is any rebound in support for the New Democracy and Pasok parties, since voter turnout patterns will probably normalize.
Given all this uncertainty and the growing risk that Greece may exit the euro over the next year, why hasn’t the market reaction been more dramatic? After all, Citigroup has a new forecast arguing that it now believes the likelihood of a “Grexit” is between 50 percent and 75 percent.
It appears as though the dominant view in the market right now is that Europe is in a better situation to absorb or muddle through a Greek exit than it was six months ago, when Greece last threatened a referendum on its EU membership. Analysts are generally pointing to a combination of factors: Many investors have already fled Greece or been forced to take losses, and European bank balance sheets have already adjusted to losses on Greek assets.
That even more capital might leave Greece is, along with the deficit, one of the things most limiting the country’s next coalition government, whoever joins it.
This year, Greece is expected to run a primary deficit of 1 percent of GDP. The primary deficit means the government needs to borrow to fund basic government services. Next year, the primary account is projected to be in balance, and the deficit is set to consist entirely of interest payments. At that point, incentives for policymakers may change, since they would no longer be beholden to creditors to finance general government services. (Of course, they would still need creditors to finance the interest payments on their debt.) But in the meantime the IMF, European Commission and European Central Bank will still have leverage over Greece’s fate.
As Greece approaches its next election, it will be important to track the campaign rhetoric. A coalition government that unites in opposition to austerity will also be saying goodbye to the euro and hello to a new Greek currency. That could cause depositors to flee Greek banks. In the event of a disorderly exit from the EU, the new Greek drachma will likely be worth much less than a euro. Depositors will suspect that such a devaluation would be coming and then have every incentive to exchange a euro on deposit in Greece for a euro on deposit in Germany before the unlimited 1-for-1 conversion rate ends. Otherwise, their money would lose much of its value. That’s the kind of mass exodus Greece cannot afford.
To avoid this scenario, the new government – whenever it’s installed – will have to take concerted steps to make membership in the currency union seem permanent. Right now, it’s hard to see how a new coalition government that would roll back austerity, while also instilling the necessary confidence in the currency union to stave off a summer flight of capital, could be formed. Painful as austerity may seem, at this stage, all of the alternatives appear to be much worse.
PHOTO: Supporters of the extreme-right Golden Dawn party raise flares as they celebrate poll results in Thessaloniki, northern Greece, May 6, 2012. Golden Dawn is set to become the most extreme right-wing group to sit in parliament since Greece returned to democracy after the fall of a military junta in 1974. REUTERS/Grigoris Siamidis