The markets got their wish earlier this month with a victory by the center-right New Democracy (ND) party in the Greek general election. The next day, however, the market rallied for a total of only three hours. Investors hardly noticed when ND successfully agreed to a governing coalition with the Panhellenic Socialist Movement (Pasok) and the Democratic Left party. This lackluster market reaction reflected the fact that ultimately, there was no good outcome from the Greek election. With ND returned to power, Greece has just returned to the unsustainable status quo.
Vastly Different Parties in the Running, but Did it Matter?
ND and and the left-wing, anti-bailout Syriza party fought hard in the Greek election in order to win the 50 bonus seats that are awarded to the party with the biggest share of votes. The two parties hail from opposite sides of the political spectrum and appeal to different strata of Greek society.
ND’s biggest support base was among pensioners in Greece, while Syriza was most popular with younger voters. The party heads of ND and Syriza represent very different leadership styles as well. ND leader Antonis Samaras is a party stalwart who was part of the previous government coalition and signed the second Greek memorandum of understanding. With the burden of having been in government, Samaras has been more moderate and has highlighted that he would like to work with the troika – the European Central Bank (ECB), International Monetary Fund (IMF) and European Commission – to renegotiate parts of the second Greek bailout.
Syriza leader Alexis Tsipras is almost the polar opposite. An inexperienced politician, he has tried to separate himself from the longstanding political elite in Greece (despite having been a member of the youth communist party himself) by refusing to wear a tie. He has mobilized the part of Greek society that is anti-austerity but contradictorily pro-Eurozone membership. Tsipras focused his campaign on tearing up Greece’s memorandum of understanding and refusing to implement further austerity, under the assumption that the core countries would never push Greece out of the Eurozone.
Despite the significant differences between ND and Syriza and their respective leaders, it does not matter much which party won the June 17 election. Both parties wanted to renegotiate the second Greek bailout with the troika. There was a risk that had Syriza won, the party could have brought Greece to the edge of the cliff in negotiations, looked over, and jumped into a default and Eurozone exit rather than backing away. But more likely the new Greek government, whether led by ND or Pasok, would have backed down and compromised with the troika.
Game of Chicken
It is in no one’s best interests for Greece to default and exit the Eurozone. If Greece were to fail to come to an agreement with the troika over its bailout program, and the troika refused to transfer further loan tranches, the Greek government would run out of cash in July. With no more loans and a primary deficit (a budget deficit not including debt interest costs), the country would have to stop paying public sector wages and pensions and would have to slash spending sharply. Given the civil revolt this would inspire, it is much more likely that the government would print its own currency to pay public sector workers and support public expenditure, thereby exiting the common currency area. The only way Greece could stand to default within the Eurozone would be for the country to wait to default until it at least had a primary balance.
From the troika’s perspective, Greece is a small country but could be the match that lights the fire of contagion across the entire region. With the much bigger countries Spain and Italy already facing unsustainable borrowing costs, the troika has an interest in avoiding a Greek default and Eurozone exit at least until those bigger countries are sufficiently firewalled from such an event.
Eurozone policymakers have been busy erecting a firewall of cash from EU bailout funds and the IMF over the past six months for this purpose. The biggest component of this firewall, the European Stability Mechanism, may not be ratified or implemented until the end of this summer.
The compromise that ND and the troika will find on the second bailout program is likely to include a relaxation of the fiscal targets established for Greece so that the country does not have to implement as much growth-killing austerity up front as was originally intended. Is this a game changer for Greece? Absolutely not. Stuck in a never-ending austerity/recession downward spiral, it was unrealistic to expect Greece to hit the fiscal targets set for it in the first place.
Even if the fiscal targets are relaxed in the Greek bailout, the Greek government must still pursue an aggressive structural reform program, which in the short term will result in even higher unemployment (unemployment already exceeds 23 percent in Greece, and youth unemployment is above 50 percent). There is no reason to believe that a ND/Pasok/Democratic Left coalition can succeed in implementing the terms of the memorandum of understanding where the previous government failed, and in the face of ever-growing austerity fatigue.
Greece will therefore remain stuck in the current austerity/recession spiral. As the government is forced to implement further austerity, social unrest may rise and internal opposition to additional retrenchment by members of parliament could cause the government to collapse, likely by the end of this year. New elections would be held, and this cycle will be repeated.
Ultimately, Eurozone membership is a political decision. The Greek electorate and most of the political elite are overwhelmingly in favor of Eurozone membership. As Greece experiences cycles of elections, an electorate increasingly squeezed by additional austerity measures will eventually put in place a government willing to consider alternatives to the current path. At that point, the Greek government will choose to exit the Eurozone and will negotiate a divorce with the troika.