MANY people are asking what the Greek election result represents: a turning point? The end to questions over Greek membership of the euro? A light at the end of the tunnel? Unfortunately, none of the above. The result of the Greek election, although broadly viewed as the best possible outcome, does not fit any of these descriptions. Don’t get me wrong, it could have been a lot worse, but that doesn’t mean much will change.
First off, hopes of a national unity government, pushing a consensus line, look to be misplaced. Any new government will be formed of a few disparate parties, coming together due to a shared fear of the catastrophic impact of a Greek exit from the euro. But with different ideologies on how to return Greece to economic growth.
The Syriza party will take up the position of opposition – it has already refused to join a government with New Democracy, the largest party – and with the ever-present open goals of “austerity” and the failing Greek economy, expect the government to be under permanent attack. This doesn’t exactly instil confidence, does it? Any new government will be shaky at best, with the threat of new elections always on the horizon if one of the coalition partners drops out – something I believe could become a reality within six months.
Furthermore, a renegotiation of the bailout terms will, at best, only buy the new government some extra time. Besides, this also depends on the level of adjustment to the current programme, which is not expected to be huge. Sure, the Eurozone may tinker on the edges: slightly lower interest rates; extend the debt repayment period; possibly even ease the deficit targets slightly and stump up some funds for investment. But, the core aims of the agreement will ultimately stay the same. This means the agreement will remain unachievable, ineffective and poorly targeted at the real problems in Greece (namely competitiveness and systemic administration flaws).
Many readers may have heard much of this before, leading to the conclusion, why doesn’t Greece just get out of the Eurozone now, rather than prolonging its suffering?
That is the question which should be asked. There are clear economic benefits to Greece leaving the euro, but the risks involved in an imminent exit could outweigh these benefits in the short term. We estimate that if Greece left the euro now, it could still need between €67bn (£54bn) and €259bn in external short-term support, mostly because it’s in the midst of a bank recapitalisation. Without this external support, the threat of a banking-sector collapse and hyperinflation (due to money printing) would be all too real.
Uncertainty will continue to prevail. The controversial opposition will benefit as the government struggles with the adjustment programme. Furthermore, as Greece approaches a balanced budget and a more stable banking sector (though still messy), an exit will look increasingly attractive – particularly if the alternative for Athens is to permanently give up economic and political sovereignty.
Raoul Ruparel is the head of economic research for Open Europe.