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May 16 2012

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Greece: Between a Rock & No Place

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The Final Act Begins

The best argument against democracy is a five minute conversation with the average voter,” said the great British Prime Minister, Winston Churchill.

The no-doubt “tongue in cheek” comment has unexpectedly found its fullest expression in present-day Greece.

Elections on May 8th decimated the two parties that have mostly run Greek affairs since military rule ended in 1974. Blamed for mismanaging Greek affairs in the lead up to the sovereign debt crisis in 2010, and then again for agreeing to a German sponsored EU austerity plan of radical budget cuts and tax increases  to stabilize Greek debt, amid deep recession, the center-left PASOK party garnered only 13 percent of the vote, while center right New Democracy received 19 percent.

PASOCK and New Democracy – which had been in a grand coalition in the lead up to the election – had control 77 percent of the parliamentary seats. After the election humiliation the two major parties now barely make up 32 percent of the new Parliament.

The big winners in Greece’s election were fringe parties, opposed in one manner or another, to the terms of the EU bailout.

Of those parties, the biggest winner was Syriza, a more radical leftist party, which beat out PASOK to come in second with 17 percent of the vote. Syriza is made up of parties including the Coalition of Left Movement and Ecology and a revolutionary Marxist group called the Internationalist Workers’ Left.

In the days since the election, each of the major party winners have sought to form a coalition, all without success. Failure to form a stable government rests largely with Syriza, which has been adamant that as a precondition of joining a coalition government, Greece must nullify the EU austerity agreement.

When Greek President Karolos Papoulias called all the parties together in a last ditch attempt to form a government, Syriza didn’t bother to show up. As a result new elections will now be scheduled, probably some time in mid-June.

The political deadlock in Athens could hardly come at a worse time for the country.

Greece missed a 436 million euro debt payment to private investors on Tuesday.  It has 30 days to make good on it. Further, under the terms of the austerity plan/bailout, Greece has pledged an additional 15 billion euros in budget cuts in return for the next installment of EU bailout money, which is essential for Greece to pay its bills.

If Greece does not receive the EU funds, the government will literally run out of money in late June or early July.

A real life consequence of the political gridlock and escalating economic uncertainty was a mini-run on the Greek banks yesterday. Greek citizens withdrew the equivalent of nearly a billion dollars from financial institutions, further weakening Greek banks which have taken a beating since the crisis has unfolded.

Distilled to its essence, the emerging Greek political challenge is captured in the rise of Syriza and its unstated belief that Greece can safely walk away from the bailout agreement, but remain in the Euro.  That the costs to the EU of a Greek bankruptcy and economic collapse are greater than an agreement to modify the terms of the bailout that would cushion and maintain Greece’s social welfare paradigm.

It is a new twist on an old saying, if you owe the bank a little, the bank owns you.  If you owe the bank a lot, you own the bank.

But outside of Athens, that proposition is an enormous gamble,  in particular for the domestic constituencies of each of the member states, none more important than Germany.

As the strongest and richest economy in Europe, Germany has pumped billions into failing economies in return for austerity agreements that are designed to eventually return the indebted countries to solvency and then growth.

Angela Merkel and her government must decide between the costs of two scenarios.

First, what are the costs to the greater EU of a Greek collapse, in particular, the potential financial contagion to “at risk” countries such as Italy, Spain, Portugal and Ireland? Would the collapse create an unavoidable chain reaction if Germany and the EU stand fast on the bailout terms and allow Greece to go belly up?

Or, conversely, what are the risks in renegotiating the painstakingly assembled bailout agreement for Greece as well as the austerity treaty for the EU?  If “at-risk” countries such as Italy, Spain, Portugal see that the EU will modify austerity terms if their public cries loud enough, will the mechanisms put in place in those countries simply be a fig leaf for public show, with no real enforcement? That can only lead to continued, unsustainable debt that started the crisis to begin with, with even greater long term costs to the continent.

And it is sometimes forgotten that Merkel is not speaking for the EU, but for Germany.

Having provided billions of euros to failing economies, what is the German appetite for continued financial largess if “at risk” countries refuse to take actions to reign in the spending a debt?  While Merkel’s party has lost a string of state elections recently, it would be an epic misreading of German intentions if observers believed that the German political divide is between a party that advocates austerity for the EU and another that welcomes additional German spending on EU stimulus in failing countries that are not meeting fiscal targets.

There is an inflection point for the EU, as it relates to the sovereign debt crisis, where it is beyond Merkel’s ability to deliver German support, based on domestic political constraints. That nexus that remains is a vacuum of power that will decide the fate of he Euro experiment.

For now, in Greece, all eyes are on the next election.

Syriza is sticking to its anti-bailout guns, and current polling suggests that Syriza’s support is growing ahead of the June elections. If the two traditional parties are unable to turn the tide, a series of previously unthinkable actions will follow, with potentially destabilizing consequences, not just for Greece and the EU, but for the global economy.

 

 

 

 

 

 

 

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