Greece jumps out of the fire and straight into the frying pan

 
Allister Heath
IT was the kind of giant kicking sound that always warms the financial markets’ hearts. And no, I wasn’t referring to football, but to Greece’s nail-biting election finish, which saw the euro granted a stay of execution. Pro-bailout parties eked out a small victory, avoiding an immediate and explosive Eurozone crisis, albeit at the cost of kicking the Greek debt can further down the road. And so Europe’s extended Groundhog Year continues.

The currency, equity and credit markets will rejoice this morning – and the bounce will almost certainly be greater and longer-lasting than the damp squib that followed Spain’s flawed bailout – but Greece and the Eurozone are hardly out of the woods. The choice always was either a near-immediate Grexit and default – had the anti-bailout far-left Syriza party and other fellow-travellers won – or a slow, drawn out disaster if the mainstream parties were to win. We are now about to begin this latter scenario. A Grexit has been delayed, not prevented; time has been bought to allow other Eurozone basket cases, such as Spain and Italy, to implode at their own paces, without the process being accelerated by Greece.

The centre-right New Democracy will probably go into some sort of coalition with Pasok, its socialist rival, and have just enough MPs to govern. To reward the Greeks for having voted the “right” way, we will see plenty of warm words from the EU and (most likely) some minor concessions on the bailout agreement. These changes are unlikely to have much of an effect, however; Greece will remain unable to reform itself, improve its administrative structures, deregulate its economy, raise enough revenues or cut spending sufficiently. All the main parties campaigned on a deluded, dishonest set of promises that they will never be able to keep to.

Even on the most optimistic set of projections, the Greek economy will remain crippled by an unsustainable national debt which even under utopian economic conditions would guarantee stagnation; in the real world, given the rate at which GDP has been shrinking, this debt will never be brought under control and tens of billions more will have to be written off. Greece’s budget deficit remains too high and its unit labour costs still need to fall by 30-40 per cent if it is to become competitive again; but given that there is no appetite to slash wages by that much, unemployment will continue to rise. Given all of this, and despite the extreme short-term pain, a managed Grexit and debt write-off would be the least disastrous solution for all concerned, the long-suffering Greek public as well as the global economy. International economic authorities weren’t ready to cope with such a scenario yesterday; they had better be better prepared when the New Democracy-led government fails, as it inevitably will, and the next elections are called.

Syriza is already waiting in the wings. Alexis Tsipras, the party’s economically illiterate, ex-communist 37-year old leader, has taken Syriza from 4.6 per cent of the vote in 2009 to 27.1 per cent today. And if Syriza falls back, the danger is that the fascist Golden Dawn party will gain even more seats next time.

Yesterday’s election was billed as one of the defining moments of modern European history. But far from representing some sort of turning point, it will probably be entirely forgotten within a year, not even registering as a footnote in the story of the Eurozone’s slow demise.

Greece is set to face Germany in the next round of Euro 2012. The game will be riveting – but one thing is for sure: it won’t be the last bust-up between the two countries this year.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath