Greece: Before And After
In one of the most fascinating psychological shifts, there has been a massive shift in the perspective of the Greek electorate since the election two weeks ago. Almost as if the size of the actual votes for Syriza, the far-left anti-bailout party, gave citizens 'permission' to be angry and vote angry. The latest opinion polls, as per Credit Suisse, show the center-right New Democracy party crashing from 108 seats to only 57 as Tsipras and his Syriza colleagues soar from 52 seats to a hugely dominant 128 seats. Is it any wonder the market is pricing GGBs at record lows and 'expecting' a Greek exit from the Euro as imminent given the rhetoric this party has vociferously discussed. On the bright side, the extreme right Golden Dawn party is seen losing some of its share.
Greece: Election results...
Greece After Elections - current opinion polls...
UBS: Europe: Time to choose
Recent election outcomes in Europe herald the next, increasingly perilous stage of the Eurozone crisis. Voters are angry and are venting their anger at the ballot box. Their sources of frustration are clear—recession, surging unemployment, and the erosion of the previously sacrosanct welfare state. Increasingly, too, those wrenching dislocations are associated with ‘sinister’ external forces: 'Germany', 'Brussels', 'The IMF', 'globalisation', 'creditors' or 'capitalism'. Yet the implications for Europe of voter discontent are much less obvious. The desire for change has not found a coherent expression of what changes Europeans want. Incumbents are being shown the door, but the patchwork of protest parties that replace them does not offer a viable alternative, much less a blueprint for dealing with Europe's economic and financial crises. And expressions of frustration in debtor countries have their analogue in creditor countries as well. No one is happy with the status quo.
Still, how Europe's political leaders address voters' grievances will go a long way to determining the fate of the Eurozone and, quite possibly, the course of European history in the 21st century.
Matters in Greece deserve most attention. The fragmentation of Greek politics suggests that Greece may be economically, politically and socially incapable of restoring fiscal sustainability and a competitive economy by pursuing the orthodoxy demanded of it by the troika (the EU, ECB and IMF). At the very least, a substantial fraction of Greece's debt will have to be further written down. But even then it is improbable that the social fabric of Greece can withstand, unaided, the years of declining living standards required to restore its fiscal health and competitiveness within the Eurozone.
That narrative is not new. But until now it has been considered taboo by the troika, which has insisted that its plans, properly implemented, would work. The flaws in that thinking have been laid bare by the outcome of the Greek elections.
What are the alternatives? Greece could decide to leave the Eurozone. That once-unspoken possibility was broached this weekend by ECB Governing Council member Honohan. Yet it is by no means clear that the re-introduction of a national currency would be Greece's best option. Exit would entail leaving the EU, large-scale default on foreign obligations, a collapsing financial sector, surging inflation, and most probably little improvement in national competitiveness. And, as we pointed out in earlier research, history suggests the calamitous financial and economic consequences of an exit could threaten the institution of democracy itself.
A Greek exit could also put the rest of the Eurozone at considerable risk. Residents of other countries, such as Portugal, Spain, Italy or Ireland, might well conclude that the probability of leaving the Eurozone had increased, prompting them to move deposits out of their banks. The resulting bank runs could prove impossible to manage, resulting in a rapid and significant deterioration of financial and economic conditions across the Eurozone.
The other option is for Greece's official creditors to acknowledge the impossibility of their policies and grant Greece substantial debt relief as well as support via fiscal transfers. Those policies would not change the inevitable decline in Greek living standards from today's unsustainable levels. But they would cushion the blow, making it politically possible for Greece to remain a member of the Eurozone (and the EU). In this second scenario, Greece would essentially become a ward of the Eurozone. The price would undoubtedly be some loss of sovereignty and an economy in long-term decline accompanied by a shrinking population as many of Greece’s more ambitious and talented residents leave to seek better futures elsewhere.
So the choice facing Europe is stark. One path leads to fragmentation, accompanied by considerable risk of Eurozone financial and economic disarray. It threatens to end more than a half century of political integration in Western Europe, effectively changing the post-war course of European history.
The other path requires a degree of political change that is next-to-impossible to imagine. It demands acceptance of economic and political integration beyond Europe's current grasp. In particular, Europe's richer countries would have to acknowledge that European unity requires burden-sharing on a scale which hitherto has been politically unimaginable.
Faced with those choices, Europe's politicians will undoubtedly prevaricate and deny. The troika will, with minor modifications, probably insist on 'staying the course'. Yet it seems to us that ignoring clear voter demands for change might well be Europe's worst choice.
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