View the article online at http://citywire.co.uk/money/article/a596954
Greece's election buys time – but Europe must act fast
Relieved by the Greek vote, EU leaders have a brief window of opportunity to act, writes Rob Kyprianou.
Two days after the Greek national football team dug deep and, against the odds, produced a rousing performance against Russia that prevented them from being ejected from the European Championships, the Greek people followed up and narrowly voted against ‘Drachmaggedon’ – the imminent and disorderly exit of Greece from the euro.
With votes still being counted, support for New Democracy stood at around 30%, and for Syriza (the main anti-bail out party) at around 26.5%. The Socialist PASOK party managed to hang in there, coming third with around 12.5%, followed by the Independent Greeks on around 7.5%, Golden Dawn on around 7%, the Democratic Left (a potential pro- bailout coalition partner) at around 6% and the Communist Party on 4.5 %.
Although the three main pro-bailout parties – New Democracy, PASOK and the Democratic Left - were unable to gain 50% of the vote, the peculiarities of Greece’s ’Reinforced’ Proportional Representation system gives the largest party 50 of the 300 assembly seats. This would give New Democracy around 130 of the seats which would be enough with PASOK to form a majority coalition government.
The Greek politicians in the early hours after the polls closed were already showing that a pro-bailout, euro-friendly coalition may still require some work. PASOK have suggested that they would like Syriza in a grand coalition and that their participation in a cosy coalition alone with their historic bitter rivals, New Democracy, is not a foregone conclusion. Syriza’s leader for his part has refused to be part of any coalition, preferring to sit back into the much easier role of the leading opposition party. Expect some brinkmanship, rhetoric and mixed signals as the coalition discussions progress today and tomorrow.
Even Samaras, the leader of the ‘victorious’ New Democracy party, has himself already engaged in the game of mixed signals, saying in response to the election result that ‘Greece’s position in Europe will not be put in doubt. Fear will not prevail’. He went on to describe the outcome as ‘a stable foundation for national unity with a European direction’. But, in a clear message to Europe’s political leaders, that negotiations on Greece’s bailout terms should be expected, he also said that ‘the Greek people voted for policies that will create jobs, growth, justice and security’.
Test for 'unholy alliance'
Even if a pro-bailout coalition is formed this week, negotiations on bailout are likely to follow. Such negotiations are likely to test the stability of the ‘unholy alliance’ coalition, as described by Syriza’s leader Tsipras, now that the people’s expectations have been raised since the May 6th election. Greek realities have not changed because of the election – unemployment is at record highs of 22% and rising, the economy has shrunk around 25% during the crisis, the public debt-to-GDP ratio is around 160% and rising, and further severe austerity measure implementations are pending.
Just how tested any ‘pro-bailout’ coalition in Greece will be will largely depend on Europe’s response to the election. The ball is now clearly in Europe’s court – having moved towards the European position by stating clearly that Greeks want to stay in Europe and will not tear up wholesale the bailout terms, will the Europeans move closer towards the position of the bailout countries? Such movement is not just about recognising the importance of growth in any fiscal consolidation programme – this now seems established in principle since Hollande’s victory in France – but also in creating the institutional and political structures that will support sharing financial liabilities and responsibilities.
Pressure on Germany
The shift in noises from Europe since the May elections in France and Greece has been clear. EU, ECB and many national leaders are openly talking of the need for measures to deal collectively with the euro’s woes – and the political pressure for action from outside the Euro zone is also hotting up.
All doors lead to Germany – without their support no progress is possible. The pressure on German chancellor Angela Merkel is intense, not only externally but also from within Germany. Merkel is unable to deliver the necessary votes for the December European fiscal treaty ratification without the support of the opposition parties. The SDP and the Greens are in the pro-growth camp and are aware of their leverage over the treaty vote and will extract a price. Merkel has shown signs of shifting ground, but aware of the resistance within her own party, her endorsement for collective action and responsibility is always qualified and ambiguous.
The next big hurdle
We may not have to wait long for more clarity on how far the euro leaders are prepared to go to save the euro. Monti, Hollande and Merkel are meeting later this week in advance of the EU Summit on June 28th / 29th. No doubt relieved by the Greek vote, EU leaders must now decide if and how to respond to the fundamental fault lines that have been so clearly exposed in the crisis. At an absolute minimum progress must be shown on two key issues:
- The recapitalisations of Europe’s banks – the Spanish €100 billion bank bailout is not the end of this debate by a long way. This may require a banking union/ coordinated supervision and insurance scheme which legitimises the concept of shared responsibility by Euro members.
- Some form of shared responsibility for euro sovereign debt. The idea that serious sovereign indebtedness within a single currency zone can be addressed solely by local austerity and local responsibility for repayment has been shown to be non-viable socially and politically. But do euro leaders have the political will to respond by accepting some form of shared responsibility, whether by, for example, a European Redemption fund and/or the issue of Eurobonds? It is almost inevitable that any sharing of financial responsibilities will have to be accompanied by agreement to share decision making in some form or other.
'Come and get us'
Whether 17 fragmented political leaders and mandarins in the EU and in the European Central Bank can agree on the nature of this move towards Federalism is open to doubt. But then again, Europe seems only to move in a crisis and this crisis has by no means gone away. What is sure is that without some response, the relief rally that is likely to follow yesterday’s result will be short and brief.
In one of those ‘sport mimicking life’ moments, on election day the captain of the Greek national football team invoked the spirit of Leonidas and his 300 Spartans at Thermopylae and boldly predicted that his team would beat Germany in a penalty shootout in the next round of the European competition. Greece has once again thrown down Leonidas’ famous defiant challenge to the Emperor Xerxes’ demand for surrender: ‘molon lave’ or ‘come and get us’ – this time to Germany and the rest of Europe in sorting out the Euro mess. Like Leonidas, the election may have bought some time to do so, but it will be a narrow window of opportunity. Hopefully, Greece can in the meantime avoid the fate of the brave Spartan king and his men.
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by Gavin Lumsden on Oct 23, 2016 at 00:01