Samaras' victory offers relief but no answers


18 Jun 2012
Stephen King, Group Chief Economist

Stephen King

So, huge sighs of relief all round. Greece's New Democracy party, led by Antonis Samaras, managed in Sunday's elections to head off growing support for the radical left wing Syriza alliance. Mr Samaras looks set to become Greece's next Prime Minister.

The Athens ATMs won't run dry, there will be no sudden reintroduction of drachmas and Greece will happily be able to persuade itself that it remains firmly held in the bosom of Europe. The euro lives to fight another day.

Mr Samaras will now attempt to form a ragtag government including more or less everyone except Syriza. At the very least, that means a coalition involving both the centre-right New Democracy and the socialist Pasok party, hardly the cosiest of bedfellows. They have, after all, been at each other's throats for the past few decades.

Still, both New Democracy and Pasok claim to be both pro-euro and pro-austerity, so Greece's European partners and the wider world should be able to breathe a sigh of relief.

In the midst of the euphoria that will doubtless dominate financial markets in the days ahead, a few choice facts will be conveniently pushed to one side. New Democracy was, arguably, the party that got Greece into its current mess in the first place, having been in office between 2004 and 2009. Pasok was the party in charge of putting things right between 2009 and 2011. During that period, the Greek economy collapsed, too many austerity promises were broken and the Germans and French eventually ran out of patience, warning Greece that, if it didn't behave, its days in the euro were numbered. And Greece has no real history of cosy coalition politics: it may just be possible to form a government after Sunday's election but how long it will last is another matter altogether.

Mr Samaras, meanwhile, will doubtless be hoping to renegotiate Greece's austerity obligations once again. In that regard, the mainstream Greek parties are not so different from Syriza, much to the irritation of Greece's European partners. The Troika's ongoing frustration with Greece, after all, has been the yawning credibility gap between promise and delivery with regard to both austerity and long-run structural reform.

So before we all drink too much celebratory retsina, it's important to recognise that Greece still has mountains to climb. True, there have been big improvements in the fiscal position over the last year or so but Greek access to international capital markets is non-existent, the economy has already contracted 16 per cent and is set to shrink further, and its creditors expect to see a lot more reform than has so far been delivered.

At the end of the month, European leaders meet in Brussels to discuss the next steps with regard to the eurozone's governance.

The eurozone, meanwhile, has its own Mount Olympus to conquer. While the Greek elections have reduced the chances of an early Greek exit, they have only papered over the cracks that have emerged over the last two or three years. The battle between northern European creditors – who, until recently, lent far too generously – and southern European debtors, who invested the loans far too stupidly, is set to continue. Thanks, initially, to the sub-prime crisis, levels of economic activity across Europe are much lower than was anticipated just five years ago, making it that much more difficult for debtors to repay their creditors. Whatever one thinks of Greece's behaviour in recent years, it's not the only country having difficulty accessing capital markets.

Pre-euro, we know what would have happened. Countries in the south would have devalued against their northern rivals. The Deutsche Mark value of, say, peseta debt would have dropped and Spain would have achieved a "default by stealth" alongside a big improvement in competitiveness.

Life in the euro is not so easy. No one, as yet, has found a convincing answer for dealing with excessive debts or with southern Europe's lack of competitiveness. In the absence of currency moves, what kind of adjustment is needed? Austerity hasn't worked, no one wants a wave of defaults and, as yet, the Germans are dead against fiscal transfers.

At the end of the month, European leaders meet in Brussels to discuss the next steps with regard to the eurozone's governance. The French want a banking union first of all, reasoning that, without it, Spain's problems – and contagion effects to eurozone banks more generally – will only worsen. Germany, however, insists that, as a banking union is the first step towards a fiscal union, it cannot be allowed to happen without the eurozone first of all creating some kind of political union.

Logic is perhaps on Germany's side. Time, however, is not. Even with longer-term refinancing operations and Spanish bank bailouts, the bank and sovereign runs that have undermined the euro's integrity have only accelerated. The Greek election results will doubtless slow the process temporarily but they hardly represent a handbrake turn.

The good news is that there is no imminent Greek exit. The eurozone's structural integrity remains intact for now. The fear of break-up will fade and the sell-off of peripheral debt should reverse.

But most of the big questions remain unanswered. Can a monetary union survive without a fiscal and political union? Probably not. Can the southern European nations improve their competitiveness? Yes, but only very slowly. In the meantime, will they need a helping hand from German taxpayers? Yes, but Berlin doesn't want to foot the bill.

One smaller question also needs to be addressed. Will a New Democracy-led coalition really administer the tough medicine demanded by the Troika? History suggests otherwise. Beware, then, Greek voters bearing gifts.

Stephen King originally wrote this article for the Financial Times newspaper, published on 18 June 2012.