The Greek Elections: The Good, the Bad and the Ugly

All eyes were focused on the Greeks on Sunday. Even German Chancellor Angela Merkel was sitting in her plane on the tarmac in Berlin waiting for the results of the elections before she could take off for the G20 meeting in Los Cabos, Mexico. If Syriza had won the elections, Merkel and her EU partners would have gone into chaos management, putting in effect contingency plans to contain the likely contagious fallout from the uncertainty that would have arisen as to Greece’s future in the euro and possibly the EU. (And that’s not to mention hundreds of billion euros lost by European banks, governments and the European Central Bank as a result of Syriza’s stated intention to default on its debt to foreigners.)

Fortunately, no such thing happened. New Democracy won a plurality of the seats in the legislature and its leader, Antonis Samaras, is now trying to form a coalition government that can get on with the fiscal and economic adjustment program that previous governments have been pursuing (with limited effectiveness). That’s the good news. In spite of suffering the consequences of a deep economic recession, a large portion of Greek voters indicated their desire to keep the euro and remain part of the European family, at least for the time being.

“The ugly news is that with the elections out of the way, Greece can finally get down to business—meaning that the Greeks finally have to put their fiscal and economic house in order.”

The bad news is that financial markets did not take long to forget about Greece and move their focus back to Spain and, to a lesser degree, Italy. Yields on ten-year Spanish sovereign bonds jumped above seven percent, a level that some consider too high to be fiscally sustainable in the medium to long term (since the interest paid on debt simply becomes too high). Now the fear is that Spain will also require a bailout—in addition to the €100 billion line of credit that the government has already received from its EU partners to recapitalize its failed banking system. And once Spain gets help, it will have to be Italy’s turn (by some dubious logic of contagion), at which time all hell will supposedly break loose.

Of course, if investors calmed down a bit, they would realize that neither Spain nor Italy actually require a government bailout. The only reason why bailouts would be necessary is if investors stopped lending to those governments at decent rates out of fear they would not be able to repay their debt. Hence, instead of complaining that things are bad and that Eurozone governments are not doing enough quickly enough, investors could help the situation by ignoring the self-fulfilling prophecies that they so love to fear. If Euro-Med governments did not have to constantly cut their spending (or raise taxes) to pay for higher interest rates on their debt as it gets refinanced, then economic growth would be less affected and structural reforms would be politically easier to implement.

The ugly news is that with the elections out of the way, Greece can finally get down to business—meaning that the Greeks finally have to put their fiscal and economic house in order. There are no more excuses. In recognition of the electoral result, and in order to shore up his political support, Samaras will surely get some kind of reprieve in terms of how quickly he must meet the objectives of the adjustment program accompanying the bailouts Greece is receiving from the EU and the IMF. However, the reforms and restructuring that Greece should have been doing over the last decade or so (instead of going on a debt binge) must now be implemented.

The consequences are ugly and will continue to be so for years to come. But there is no alternative if Greece wants to stay in the Eurozone and to build the prosperous economy its people aspire to. In the meantime, Greece can at least count on the financial support of its European partners and the IMF. With the elections, a large portion of Greeks chose the lesser of two evils. Now they have to act on it!

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