Yesterday’s election result in Greece was about the best that could have been realistically hoped for. And that might be the most depressing thing. Let’s recap: Greece is broke. Greece’s government needs loans to pay salaries and pensions, but only a lunatic would actually lend money to Greece. Greece ended up getting a series of loan agreements from the International Monetary Fund, the European Commission and the European Central Bank (popularly called the “troika.”) Greece’s government has signed a series of agreements popularly called “memorandums” in which Greece’s government promised to cut spending and raise taxes in order to balance the budget and pay back Greece’s debts. Greece also has to privatize government-owned companies and implement market reforms (opening restricted professions to competition, making it easier for employers to fire workers, lowering the minimum wage) in order to make the Greek economy more internationally competitive. The combination of Greece’s government no longer being able to float the economy by vast borrowing (Greece’s budget deficit was over 15% of GDP in 2009), tax increases, spending cuts, and unimplemented market reforms has led to five straight years of recession. Greece is looking at about a 22% decline in GDP by the end of the year and the unemployment rate is over 22% and rising fast. By way of comparison, our Great Recession saw a GDP decline of 5.4% and an unemployment rate that peaked at 10%.
Greek politics has polarized around parties that want to keep a modified version of the “memorandum” (maybe with some of the budget cut demands softened a little) and parties who want the loan agreement scrapped in the hopes that the “troika” would give Greece funds with no strings attached as a way to avoid a global financial meltdown. By far the most likely outcome of scrapping the memorandum would be the troika refusing to disburse future loan installments and Greece having to go to the drachma to pay out salaries and wages. But the lure of bluffing the troika in pursuit of free money had a certain plausibility.
The two main contenders in the last election were the nominally conservative and “pro-memorandum” New Democracy party and the radical-left SYRIZA. Greece’s Parliament has 300 seats and you need 151 seats to form a government. 250 of the seats are awarded more-or-less proportionally and the other 50 goes to whatever party finishes first in the popular vote. New Democracy finished first with just under 30% of the vote and 129 seats in Parliament. The nominally socialist but pro-memorandum PASOK party won 33 seats so that a New Democracy-PASOK coalition would have 162 seats. That means there are enough votes to prevent an immediate meltdown in the Eurozone. That’s a big deal.
There are other small mercies. New Democracy won by a margin of just over 2.5%. That isn’t a landslide, but it big enough that there won’t be a big “we wuz robbed” movement from SYRIZA supporters. It also matters that a possible New Democracy-PASOK government will have 162 rather than 151-152 members. The new government will still have some very unpopular spending cuts to make and market reforms and civil service cuts will be opposed by active and entrenched interests that don’t hesitate to take it to the street. If the coalition’s majority is very narrow, then every last eccentric, crook, and coward in either party’s parliamentary delegation will be able to hold the government hostage by threatening to vote against a given law or simply by quitting the party and joining the opposition. Now it is more likely that only a major falling out between the coalition’s party leaders will bring down the government. That is the good news. Here is the bad news:
1. Greece is still probably going to default and crash out of the Eurozone with who-knows-what results. Greece’s economy is too uncompetitive absent a major devaluation of the currency, but that is impossible since Greece doesn’t have its own currency right now . So Greece has to go the even more painful route of nominally driving down wages. Greece’s debt is too large given Greece’s sharply shrinking economy. Greece’s government and political culture are too broken. Greek society is too exhausted, divided and cynical from a five year depression (the term fits) that still hasn’t hit bottom. Greece can’t and won’t meet its obligations to its creditors.
That is the case against Greece being able to avoid default, and I’m almost convinced. Don’t get me wrong. There is a nonzero chance that Greece reforms enough and doesn’t default. It would mean Greece following through on its market reforms and privatizations + Greece reforming and downsizing its civil service + Greece maintaining a stable government despite public outcry + Greece fixing its tax collection system + the troika being willing to put off some Greece interest payments and then writing off some significant portion of Greece’s debt when Greece’s government finally consistently reaches a primary surplus. That is a lot of needles that need threading. A happy ending (and this “happy” ending involves a lot of pain along the way) is possible, but it isn’t the way to bet.
2. Greece’s politicians are about the most selfish, vain, and short-sighted organisms to ever walk upright. Just last night, the leader of PASOK was saying that he would only join a coalition if SYRIZA joined too (and there is no chance on Earth that happens.) Almost nobody took PASOK’s leader seriously. Nobody should have. He was just trying to prove a point by making SYRIZA look unconstructive. That PASOK would choose last night to strike such a ridiculous pose is a bad sign for how long the coalition will hang together as the leaders of both coalition parties constantly put their own party’s short-term interests over the public interest.
It was amazing to see Antonis Samaras (the leader of New Democracy and almost certainly the next Greek Prime Minister) yesterday. In his “victory” speech he looked and sounded exhausted and broken. About the only clear winner from last night is President Obama. A Greece-instigated Euro crisis would severely damage his chances of reelection. It is now more likely (though not certain) that this crisis will occur after the November election. The rest of us gained much less. We have a faint chance that a global financial crisis will be averted. That is all the reassurance there is to be had.