Elections in Greece held on Friday, May 11, 2012 resulted in a failure to give any party enough seats in Parliament to form a coalition government. After living for two years on international bailouts and enduring endless rounds of spending cuts and tax hikes, Greece faces the choice of submitting to more harsh austerity measures or being ejected from the eurozone. What was once thought to be a prelude to financial disaster, the exit of a nation from the eurozone is now being considered by some experts as a change that could be survivable.
Turmoil in Greece
If anyone came out ahead in the Greek elections held on Sunday, May 6, 2012, it was the Syriza party led by Alexis Tsipras, garnering 16.8 percent of the vote and 52 of the 300 seats in parliament. Tsipras has vowed that he will not back any coalition government that wants to continue its participation in the bailout deal and maintain austerity measures. Such is the instability in post-election Greece that the country’s European creditors are contemplating ejecting the country from the eurozone.
Such a prospect, considered unthinkable two years ago, is now viewed by many, including German Finance Minister Wolfgang Schaeuble, as a situation that the eurozone could easily survive. Elena Becatoros examined the implications of the Greek election and its aftermath in her May 11, 2012 article for AP Worldstream titled, “Greek govt talks fail, country closer to new vote.”
Negotiations among the various Greek coalition members have not shown any signs that the deadlock will be broken. If a coalition cannot be achieved, then the next step will be to have elections in June.
According to Becatoros, “The Fitch ratings agency warned that the outcome of the coalition talks or a new election would be critical. […] The agency said if Greece did leave the euro, it would likely place all 16 remaining euro nations’ sovereign ratings on ‘rating watch negative’ — indicating they were in danger of being downgraded.”
Have it both ways
Syriza party leader Alexis Tsipras proposes that Greece can stay in the eurozone while rejecting the strict budget-balancing measures that its European creditors want to impose on it. Such an attitude, while harmful for Greece, may have devastating effects if it becomes chapter and verse for other struggling countries such as Spain and Italy. Landon Thomas Jr. and Eleni Varvitsioti explored the austerity conundrum in their May 13, 2012 article for The New York Times Global Business titled, “For Many in Greece, Austerity Is a False Choice.”
“Analysts estimated that Greece has about 2 billion euros in cash left, which should allow the government to function until late July or August. Without the next bailout tranche of about 31 billion euros, the country would quickly default and eventually be forced out of the currency union,” Thomas and Varvitsioti said.
Apparently the Greeks believe that the threat of ejection is no more than a bluff. It is expected that the decision on dispensing the next tranche of bailout funds to Greece will be delayed until July, assuming that elections will be held in June because the new government must approve any new spending cuts and layoffs before payments can resume.
Is an exit from the union even possible? The European treaties set membership as irrevocable and contain no legal procedure for leaving or being ejected. Because the possibility of exit was never anticipated, if Greece were to leave the eurozone the result could be widespread financial panic, selloffs and spikes in interbank borrowing rates according to one London financial advisor.
Simon Kennedy and Liam Vaughan described the contingency plans for a possible Greek exit in their May 11, 2012 article for Bloomberg titled, “Schaeuble Dares Greece Exit as Contingency Plans Start.” Such plans include emergency lending, bond buying from the ECB as well as deposit insurance for lenders.
“Europe may be more resilient now to a fracturing of the single currency. The region will soon have 500 billion euros of added firepower and the IMF is fortifying its own reserves. Greece has also restructured its debt with private investors and EU bank holdings of Greek bonds have fallen by more than half from $68 billion two years ago, according to the Bank for International Settlements,” Kennedy and Vaughan said.
Currently the eurozone is comprised of 17 countries. In the months ahead, we may see that number reduced. Faced with such a possibility, policymakers are adjusting their attitudes and considering what the eurozone could be like in a few years. At least they are not giving up hope entirely.