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Greece’s presidential gamble could trigger the next eurozone crisis

Published in Business Spectator (Melbourne), 10 December 2014

Despite moderately positive growth and deficit data from Athens, the Greek crisis is far from over. If Prime Minister Samaras’ gamble of bringing forward the country’s presidential election fails, it would not only destabilise his country, it could also leave the eurozone on the horns of a dilemma.

The Greek government has to be commended for just passing a budget which is almost balanced — at least on paper. Okay, there may be doubts about a couple of billion euros, which the troika of EU, IMF and ECB believe are still missing. One might also wonder whether the official growth forecast of 2.9 per cent and a fall in the unemployment rate from currently just under 26 per cent to 22.6 per cent next year are realistic. There are nonetheless at least a few reasons to be cautiously optimistic about the Greek patient.

Unfortunately, Greece’s fiscal consolidation could still backfire politically and allow the radical anti-austerity forces to gain power. This would not only dash any hopes of a Greek recovery, it would also force the eurozone to make a choice between the lesser of two evils: to expel Greece from the monetary union and let it default on its debt, or to continue supporting it financially, despite an end to fiscal consolidation.

As always in Europe, it’s complicated.

The problem in this case is the way in which Greece elects its head of state. The Greek President may not have much power since the office is largely ceremonial. And still the election of a successor to 85 year-old incumbent Karolos Papoulias, whose term ends next March, is a political headache for Prime Minister Antonis Samaras. His coalition of conservatives and social democrats has 155 seats in the Greek Parliament — not enough to elect a president on their own.

To elect a Greek President, it takes a two thirds majority in a Parliament of 300 seats, i.e. 200 votes. If this quorum cannot be reached in two rounds, a three fifths majority of 180 votes is required in a third vote. If there is no Parliamentary majority for a candidate, a general election has to be called according to the Greek constitution (the parliamentary term regularly ends in June 2016).

Unsurprisingly, this scenario is precisely what Greece’s anti-austerity opposition wants. Recent opinion polls have the radical left Syriza party between 3 and 11 per centage points ahead of Samaras’ New Democracy party. This may not sound like much but there is yet another Greek constitutional oddity. The strongest party in elections receives a bonus of 50 parliamentary seats. This provision was once meant to stabilise centrist governments. In a future Greek election with Syriza in the lead, it might now achieve the opposite and catapult the radicals into power.

To force a decision, Samaras just pulled forward the presidential election from mid-February. It will now happen on 17 December. This means he urgently needs to find an extra 25 opposition MPs to support his presidential candidate or face the prospect of being kicked out of office in early elections. The chances of finding these additional MPs are slim considering the Samaras government has barely managed to close its own ranks in recent votes, let alone win opposition support.

It is therefore conceivable that the Greek Prime Minister will lose the presidential vote and be forced into new elections. Given that Syriza’s lead in the polls has been persistent for more than a year, we could then expect a change of government in Greece. What happens next is anyone’s guess.

One thing is clear: The moment Syriza gets into power in Greece, the eurozone will have a massive problem. Since Syriza categorically rejects the eurozone’s deal of assistance in return for austerity, yields on Greek debt would spike immediately. We can already observe in recent weeks how Greece’s political uncertainty has caused yields to fluctuate wildly.

With Syriza in government, Greece could forget trying to refinance itself in capital markets. It would not be able to afford to. At the same time, the EU would not be able to grant Greece any further assistance if Syriza does not comply with any demands for economic reforms or fiscal consolidation. If the EU does not want to lose the last semblance of credibility, it would have to cease assistance to Greece at the very time the country would need it most, as it would be cut off from markets.

The result would be a chain reaction: Capital would try to escape from Greece; the Greek government, already indebted to the tune of more than 170 per cent of GDP, would be forced into default, as would many Greek financial institutions. This would be the kind of apocalyptic eurozone disaster that for the past five years has been averted through an endless sequence of bailout packages, rescue funds and ECB interventions.

At the end of this nightmare of all eurozone leaders, there would only be one possible way out for Greece: to exit the eurozone, default on all its debt and start again. Admittedly, this may not be the worst solution for Greece but the circumstances under which it would happen would be chaotic. Besides, nobody can rule out that such events would not be contagious. An uncontrolled Greek default would have consequences for every other eurozone member. Not least, Greece’s liabilities under the ECB’s Target 2 system would need to be written off, causing substantial losses to all other European central banks.

What is sketched above is just a scenario, of course. Maybe Prime Minister Samaras will manage to find enough independent MPs to support his presidential candidate? If he thus avoids an early election and if then also succeeds in lifting Greece’s economic performance sufficiently to allow him to be re-elected in mid-2016, none of this will ever happen. But these are all big if’s.

At least from today’s perspective, it appears more likely that eventually Syriza will take over in Greece — either next year or at a later date. And then, whatever may have been achieved on budget consolidation and reform in the meantime will not be worth much anymore.

In late 2009, Greece started the eurozone crisis. Five years later, the country’s problems are still large enough to trigger the next big eurozone disaster.

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