Obama’s June got off to a bad start with the low job creation numbers and the increase in the unemployment rate. It could get even worse if the Supreme Court strikes down Obamacare (either in part or in whole) and turns his unpopular signature achievement into an unpopular and unconstitutional non-achievement. That is all bad enough, but there is also the possibility of a crisis in the Eurozone this summer that would dampen the global (and American) economy. Obama is already trying to shift the blame for economic conditions onto the Europeans, but I’m not sure the public is going to buy it and the Euro situation might get much worse very fast. So why is it possible that the European situation will reach crisis proportions later this month?
The answer is Greece. Since 1974, two major parties, the nominally socialist PASOK and the nominally conservative New Democracy have taken turns running Greece. They built an unsustainable state built on unsustainable debt and eventually the bill came due. Greece had to borrow to continue to pay its bills, but, for obvious reasons, the sane don’t want to lend to the Greek government. Greek has secured a series of loan agreements from the “troika” (The European Commission, the European Central Bank, and the International Monetary Fund.) In return for the money, the troika has insisted on a series of “memorandums.” The memorandums are promises by the Greek government to implement spending cuts, tax increases and labor market reforms to bring the Greek deficit down to a sustainable level and restore Greek economic competitiveness. With the economy no longer being floated on unsustainable foreign borrowing, taxes going up, and government spending going down, Greece has seen its GDP decline by 13% and unemployment climb to over 20%. By the end of the year, Greek GDP is expected to have declined by 22% from its pre-recession peak. By way of comparison, American GDP declined by 5.4% during our Great Recession.
Greece is still running a primary deficit. That means that even if Greece stopped paying interest on the debt, Greece would still be running a deficit of 10 billion Euros a year. Greece would still be reliant on borrowing to pay the bills, but there would be no one to borrow from if they repudiated their debt. So in the short-term, a Greek debt repudiation would mean even more spending cuts and tax increases to bring the budget into balance because borrowing would be out of the question. Obvious right? Well, maybe not to Greek voters.
One of the likely winners of Greece’s June 17 national election is the leftist SYRIZA party led by a guy named Alexis Tsipras. Tsipras is running on repudiating the loan agreement. He wants to stop paying interest on Greece’s debt, make it harder for employers to fire workers, increase the minimum wage and increase social spending. But how is Tsipras going to fund more social spending when Greece is already running a deficit and repudiating the loan agreement will leave Greece with nobody to borrow from? Simple. Tsipras wants to fund the social spending from new amounts of free money given from the rest of Europe.
Why would the rest of Europe kick in more money so that Greece could spend even more, make Greece’s economy less competitive, and all this on top of Greece refusing to pay its current debts? That is because Tsipras believes that a Greek default and ejection from the Euro would lead to an international banking crisis (and it might.) Tsipras talks a lot about international solidarity for the workers of the world, but he is basically demanding free money for Greece in perpetuity or else a Tsipras-led Greek government will blow up the world (financially speaking.)
Tsipras might actually be dumb enough to try it. His SYRIZA party was marginal until Greece’s election this May. At its activist core, SYRIZA is a collection of communist factions, radical environmentalists, and the generally confused. Think Occupy Wall Street without the technocratic well wishers like Paul Krugman and Elizabeth Warren. Now picture those people having to govern a country starting tomorrow. Tsipras himself has never had political responsibility (not even that of being a back bench member of the majority party in a legislature.) He comes from a politics of sit-ins and protest marches, and Marxist rhetoric. Stomping his feet and mucking things up when he doesn’t get his way are the only things he knows.
And yet SYRIZA is doing well. Most polls show a dead heat between SYRIZA and the main conservative New Democracy party. One poll by the center-right Kathimerini newspaper shows a clear SYTRIZA lead and the internals of the poll show greater room for SYRIZA’s share of the vote to grow in the next two weeks until the election. So why is SYRIZA so close to winning if it is such a screwed up party?
SYRIZA is winning because they are the only ones offering a plausible, quick, and easy way out of Greece’s current difficulties. The two formerly main parties (the center-left PASOK and the center-right New Democracy) are corrupt to the bone, got Greece into this mess, and have presided over years of recession, high unemployment, tax increases, and spending cuts. The only hope the formerly major parties can offer is that, at some point in the future, the policies that have brought only pain will start to bring growth. They don’t offer much and they have no credibility anyway.
Most of the other Greek parties are even more delusional that SYRIZA. The Greek Communist Party is promising to oppose any government that is elected. They are waiting around for the Revolution. Same thing with the Hitler-saluting (no I’m not kidding) neo-fascists of the Golden Dawn party. They are just waiting on a different revolution. The splinter-right Independent Greeks party are just trying to get the votes of disaffected right-leaning Greeks by vilifying the Germans and bashing immigrants. The Independent Greeks are not winning any votes based on a positive policy platform. The small Democratic Left party wants a renegotiation of Greece’s bailout agreement, but they know they can’t honestly promise everything to everybody to be paid for by foreigners. That means that the Democratic Left can’t compete with SYRIZA on the level of promises. It is a measure of the brokenness of Greek politics that SYRIZA, for all of its problems, is the only real party of hope and change.
The Greek parliament has 300 seats. 250 of those seats are awarded proportionally (it is a bit more complicated but close enough) and the other 50 go to whatever party finishes first in the popular vote. You need 151 seats to form a government. If SYRIZA finishes first (even by one vote) they will have around 130 seats in Parliament. The communists and neo-fascists would have another two dozen or so. That means that SYRIZA would have to form the core of any government or else block the formation of any government.
So here is what could happen. If SYRIZA finishes first, Germany either has to accept Greece’s default on Greece’s old debt and fund Tsipras’ social spending plans as the price of keeping Greece in the Euro, or else let Greece go through a disorderly default and have Greece leave the Euro. If Greece leaves the Euro, Greek bank accounts denominated in Euros would be seized. Your one hundred Euro bank account would become a one hundred drachma bank account worth half as much as your old one (your loss might actually be larger.) That is just one of the things that could happen.
The situation is actually a little worse than that. If you know that the government might instantaneously destroy the value of your Euro-denominated bank account, wouldn’t you withdraw the Euros out of your bank account and either ship them out of the country or stash them under your mattress? So why aren’t Greeks doing this? Well, to some extent they have been, but the outflow has been manageable so far. So why aren’t more Greek pulling their deposits out of the banks? A big reason is that many Greeks can’t quite believe that SYRIZA could really win. This was a party that has spent all of its prior history struggling to win enough votes to have any seats in parliament. Every election since Greek democracy was restored in 1974 has seen either the center-right New Democracy or the center-left PASOK finish first. Try to picture the Green Party actually winning this year’s American presidential election to have some idea of what a shock a SYRIZA win would be for the Greek electorate. Even polls that show SYRIZA finishing first among the voters shows that a plurality still expect the conservatives of New Democracy to finish first. But SYRIZA doesn’t need a majority to win. They need about 30% and for the other 70% to scatter their votes. That is very possible. The uncertainty is worsened because Greek law prohibits the publication of opinion polls in the two weeks before the election.
So what happens if the votes are counted on Sunday June 17 and it turns out that SYRIZA finished first? First, SYRIZA will have to open up coalition talks with the other parties since it is unlikely they will have enough seats to form a government on their own. Then, on Monday June 18 there will likely be a bank run as Greeks seek to withdraw their Euro-denominated deposits on the chance that the Germans call Tsipras’ bluff and let Greece sink into disorderly default and the drachma.
Then the European Central Bank would have a choice. They could either pump tens of billions of Euros into Greece’s failing banks (Euros that would be seized by the Greek government and converted into drachmas if Greece defaults - basically good money thrown after bad), or else the ECB could say that Greece made its choice to default by voting SYRIZA first and letting the Greek banking system collapse. The ECB would then have to worry about preventing the collapse of the Spanish and Italian banking systems as investors wonder which country would exit the Euro next.
The consequences of all of this would be worst for Greece, but, at the very best, this would be bad news for the US economy too. The only question is how bad. President Obama doesn’t need more bad news. Come to think of it, neither do the rest of us. That is why I’m hoping that the corrupt, incompetent and opportunistic “conservatives” of New Democracy win Greece’s next election. And President Obama should be hoping for the same thing.