Greece’s threat to the European economic recovery

Image Credit: shutterstock

It is difficult to exaggerate the importance of the Greek government’s failure today to secure sufficient votes in parliament to choose a new president for the country. Since such a failure not only forces Greece to hold snap elections by the end of January, which could see the coming to power of a radical left-wing government. It also raises the real possibility that Greece will be forced to exit the Euro in 2015 that would be a major blow to the prospects of a meaningful European economic recovery.
On the basis of current electoral polls, the Syriza Party, headed by Alexis Tsipras, should win the parliamentary elections now scheduled for January 25. Judging by Syriza’s consistent electoral promises, if elected one must expect that Syriza will roll back the austerity policies imposed on Greece by the IMF, the ECB, and the European Union (the so-called “troika”). Syriza must also be expected to reverse many of Greece’s recent structural reforms in the labor market and in the area of privatization policy. In addition, it will more than likely insist on substantial official debt relief from the ECB, the IMF, and its European partners.
The prospect of a Syriza government taking office is already sending shudders through the Greek financial markets and is undermining confidence in the still very depressed Greek economy. One must expect that the election of Syriza will put Greece on a collision course with both the troika and the German government. Since it is difficult to see how the troika and  the German government can accede to Greece’s request for either debt relief or for additional budgetary financing at a time that Greece’s economic policy would be going in a direction clearly unacceptable to its European partners. For its part, it is difficult to see how Syriza can quickly make a policy U-turn from a position that it has been consistently espousing these past few years.
To be sure, a month in Greek politics is a long time and Syriza is by no means assured of electoral victory. However, it would seem that even in the best case scenario of a New Democracy win, it would fall well short of the votes needed for forming a majority government. With a deeply divided PASOK Party highly likely to be decimated in the elections, New Democracy will have difficulty in forming a stable coalition government. It is also likely that in the election campaign, New Democracy will emphasize that if re-elected it too will take a tough line with the troika, from which line it will be difficult to withdraw after the elections.
Greece’s already battered economy can ill-afford a prolonged period of political uncertainty, and much less a radical government, especially without the backstop of a troika financial support program. For not only does Greece have substantial official debt amortization payments to make in 2015 — it is also vulnerable to a run on its bank deposits. This would especially appear to be the case in light of the recent Cypriot experience, where Cyprus’s official international lenders insisted on a large write-down of bank deposits in return for their financial support to the country. Without a troika program in place, Greek banks would not be in the position to access the European Central Bank’s rediscount window in the event of a bank run that would almost certainly lead to the further collapse of the Greek economy.
European optimists argue that, unlike in 2010, any spillovers now from a Greek crisis to the rest of the Eurozone would be limited. However, in so doing they overlook Europe’s very poor economic and political fundamentals, which make the Eurozone all too susceptible to renewed contagion from the Greek crisis intensifying. After all, Europe is on the cusp of yet another economic recession and of a prolonged period of Japanese-style price deflation. Meanwhile, its economic periphery remains highly indebted and throughout Europe support for its political elite is crumbling at a time that parties on the extreme-left and the extreme-right of the political spectrum appear to be on the march.