Greece heads towards euro exit

9 May 12
Megan Greene

The stalemate in Greece following the election makes it increasingly likely that the country will have to leave the eurozone. The split will inevitably be painful and ugly

All eyes were on France going into the weekend of 6 May, but it turns out the Greek elections have much bigger potential implications for the future of the eurozone (EZ).

Last Sunday marked a seismic shift in Greek politics, in which the two main political parties—New Democracy (ND) and Pasok—together failed to win an absolute majority for the first time since the collapse of the military dictatorship in the 1970′s. The path forward for Greece is unclear, but even the best possible scenario doesn’t look good.

Leading up to the 6 May general election in Greece, opinion polls indicated that ND and Pasok had lost support to fringe parties on the right and particularly on the left of the political spectrum. Many analysts argued that voters were expressing anger with the two main parties by saying they would support opposition movements in opinion polls, but that when it came to voting day they would cast a ballot for the same two main parties as usual.

This wasn’t the case. New Democracy came in first place with only 18.9% of the vote, followed by Syriza (16.8%) and Pasok (13.2%). A record 34.9% of voters abstained, a particularly high figure for a country in which voting is technically compulsory (though according to 2001 legislation there are no sanctions for failing to vote).

The leader of ND, Antonis Samaras, has already given up trying to form a coalition government. Now the head of Syriza — Alexis Tsipras— has three days total to try to form a coalition. If he fails, then the head of Pasok —Evangelos Venizelos — will have a turn. It is extremely unlikely that any of these parties will manage to form a coalition given the divisions between the parties that surpassed the 3% threshold to enter into parliament.

Going into the election, . ND and Pasok represent the pro-bailout parties, though ND would like to renegotiate some aspects of the troika bailout package. The communist party (KKE) is the only party that is overtly against both the bailout and Greece’s membership of the EZ. The other parties can be roughly grouped into an anti-bailout but pro-EZ membership category, though there are clearly huge differences between these parties. Democratic Left and Democratic Alliance are slightly more moderate anti-bailout parties.

ND and Pasok have no potential coalition partners following the elections on Sunday given their pro-bailout stance. As one of the more moderate anti-bailout parties, Democratic Left seemed one potential candidate, but Democratic Left leader — Fotis Kouvelis — has made it clear that he will not cooperate with ND or Pasok. Of the other parties that made it into parliament, none is likely to cooperate with ND or Pasok: Independent Greeks (10.6% support) are a splinter party from ND, KKE (8.5%) refuses to cooperate with anyone in government and Golden Dawn (7%) is an extreme right-wing party that no other Greek parties would pair up with barring severe social upheaval.

The options for Syriza forming a coalition government don’t look great either. ND and Pasok would not participate with an anti-bailout party, which means Syriza’s only realistic option is forming a left-wing coalition. However, the KKE refuses to cooperate with any other parties, and consequently a Syriza-led left-wing coalition would fall short of an absolute majority.

Once all the main parties have failed to form a coalition, the President of Greece will try to try to broker a deal. In the very likely event that he too fails to broker a deal on a coalition, a caretaker government is put into place and new elections are held within four weeks. Given that Greece has its first IMF review for its second bailout package beginning in June, the country has no time to waste in getting a government in place. Most analysts therefore expect new elections to be held on 17 June.

Are new elections likely to yield results any different to those in the first elections? It is extremely difficult to say given the dramatic political transformation in Greece last Sunday. It is possible that Syriza will be emboldened by its performance in the first elections and will continue to push its anti-bailout platform, picking up even more support in the second elections.

On the other hand, Greeks may decide instead to vote for the devil they know and cast their ballots for ND and Pasok. ND in particular has been outspoken in criticizing Syriza, rightly claiming that a rejection of the bailout could well result in Greece’s exit from the EZ. Voters in Greece are overwhelmingly still in favour of EZ membership, and consequently may come flocking back to the two traditional parties.

Furthermore, ND and Pasok are nationwide party machines. With abstention rates at record highs, they may succeed in mobilizing voters in a second election.

There are a number of different paths forward for Greece politically, but even the best option does not look very promising. Assuming that the troika will not accept a wholesale scrapping of the bailout agreement, the only option forward for Greece that does not involve an imminent default involves a coalition government comprising pro-bailout parties.

This could be possible if ND and Pasok hold on to (or even increase) their support base from the first election and form a coalition with a group of small, liberal, pro-business parties. Drasi, the Democratic Alliance and Creativity Again together gained 6.6% of the vote in the first election — enough to enter parliament — and are in talks to run together in the second ballot.

Even if a pro-bailout coalition comes into power, it would face extremely hostile opposition from the other parties and would be unlikely to have success in hitting bailout targets or implementing structural reforms where previous governments have failed. What’s more, ND and Pasok are not natural bedfellows and could be consumed by infighting as they have frequently been in the current coalition.

A pro-bailout coalition could therefore provide a solution that might last for months, not years.

The hope would be that in the meantime, a pro-bailout government could negotiate sufficient concessions from the troika to get broad-based support from the anti-bailout parties in Greece. This could pave the way for a unity coalition once the pro-bailout coalition has collapsed.

What are the chances of this working out? I wouldn’t hold my breath. We have witnessed ND and Pasok’s unsuccessful attempts to gain concessions from the troika in bailout negotiations several times already. I have  that Greece and the troika will choose to part ways in an amicable divorce as early as next year. The current political situation in Greece means that the divorce may come much sooner, and the split could get very ugly.

Megan Greene is head of European economics at Roubini Global Economics. This post first appeared on the  blog

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