Three Greek questions

1. What do you think the government of Greece should do?
2. Why do you think this would be better for Greece than other courses of action?
3. What do you think would happen if the Greek government followed your course of action?

image source (Guardian)

Greece – what next?

Join me as I gaze into my crystal ball and attempt to predict what will happen over the next while in Greece. Bookmark this page and come back to laugh at me when my predictions prove to be completely nonsensical.

First up, where is Greece now? Well it is not in great shape. Its public finances are in a disastrous state and its economy is contracting at an alarming rate. It has been unable to borrow on the open markets at affordable rates and instead has been borrowing from a combination of the European Central Bank and the IMF. These institutions have laid down stringent conditions to their loans, which have contributed to Greece's economic decline. But Greece has been a bit slack at meeting its lenders' targets, leading to a certain lack of confidence on their part.

The May 6th election result was inconclusive, largely thanks to a quirk of the Greek electoral system. 250 MPs are elected by proportional representation, but an extra block of 50 seats are given to the party with the largest share of the votes. That was New Democracy, Greece's long-standing centre-right party. Together with PASOK (the old centre-left party) and a small leftwing party a parliamentary majority in favour of continuing with the EU/IMF bailout programme could have been scraped together, but anti-bailout parties clearly won a majority of votes cast. A pro-bailout government would have lacked popular legitimacy and so could not be formed, while an anti-bailout government would have lacked a parliamentary majority. So Greece is calling new elections.

At the time of writing, my understanding is that these elections will happen on either the 10th or the 17th of June. This time I expect that they will produce an anti-bailout majority. Last time, nearly a fifth of Greeks voted for small anti-bailout parties that failed to pass the 3% threshold required to get into parliament. This time enough of them will switch to more popular anti-bailout parties. In particular, I reckon that Syriza, a far-left coalition in some ways akin to the United Left Alliance in Ireland, will finish ahead of New Democracy and pick up the 50-seat bonus. Together with the Communists and perhaps another anti-bailout party or two (but not the Golden Dawn, who are evil) they will form an anti-bailout government.

Things might get awkward if the election results fall in such a way that the far right nutters in the Golden Dawn are needed for an anti-bailout majority in parliament, but I am assuming that this will not happen.

Now, the anti-bailout lot in Greece are not actually against being lent money at advantageous rates by the EU/IMF, they just do not want to have to conform to the conditions attached to the loan. And they may also not want to pay the loan back either. So when they get into government they will basically say: "Keep sending us the money, however we are not going to stick to the austerity conditions agreed with previous governments". Their possibly naïve assumption is that Greece can tough it out with its creditors, because at the end of the day Greek bankruptcy would hurt the other European countries so badly that they will keep the money tap on to prevent thishappening.

The next tranche of bailout money is due to Greece in the middle of June, at the same time as the elections. If that money is not paid over, Greece will be bankrupt; apparently there is a possibility of the Greek state going bust even before then. My prediction is that one way or another, Greece will find itself with an anti-bailout government and no bailout money – the people who are stumping up the money for Greece (primarily Chancellor Merkel of Germany) would rather take the hit on the country leaving the Euro than give more money to a government that is repudiating the bailout conditions.

Things will then get very messy very quickly. With no one lending to it, the Greek government will only be able to spend money it can raise itself in Greece. This is not nearly enough to cover its expenditure (if it was, the Greek state would not need a bailout). It goes without saying that it will then be in the situation they call messy default – abruptly telling its creditors that they are not going to be getting any more repayments any time soon, if ever. But the problem for Greece is that it is running a deficit on current spending – the money it pays to state employees, social welfare recipients, and the other recipients of state spending is way more than what it is raising in taxes. With no bailout money it will have to start defaulting on these payments as well.

Now, in the normal run of things, if you are a country's minister for finance and you cannot borrow money and are spending more money than you are taking in there is only one thing you can do – print more money. Greece is in the Eurozone and cannot print more Euros. I think the only way around this conundrum is an abrupt introduction by Greece of a new currency, a neo-Drachma or some such. The Greek government will be able to print this up to their hearts content and pay people as much of it as they like. Perhaps initially the neo-Drachma will be a parallel currency with Greece still notionally in the Euro zone, but I reckon that the introduction of this banana money will drive the Euro out of circulation and lead to an effective Greek exit from the Eurozone.

Why will the Euro drop out of circulation in Greece? Well, the Greek government have introduced the neo-Drachma to get around the imbalance between its revenue and expenditure. Instead of cutting back on expenditure (easier said than done in a country as depressed as Greece), it will print money to make up the difference. But this gross expansion of the money supply, backed by nothing except the Greek government's not very convincing claims to be setting the country on a new economic tack, mean that the neo-Drachma will rapidly start collapsing in value relative to the Euro. Anyone holding Euro funds will hoard them or, even better, get them out of Greece as their relative value to the neo-Drachma soars.

So Greece enters into a period of hyperinflation. Public sector workers start striking in protest at being paid in increasingly worthless monopoly money and social welfare recipients fall ever further into poverty. The public sector generally starts to fall apart. Anyone with access to money outside Greece may well find that they are doing very well now, as their hard currency goes a long way, but for a lot of Greeks this period is nightmarish. Maybe further along, the devaluation of the neo-Drachma is good for Greek exporters, as their products are so much cheaper on the international market, but what exports does Greece potentially have? Maybe it will see a flood of tourists coming to spend their money in a country that is now amazingly cheap, but do people holiday in a country that is disintegrating?

Well, that's the best I can do. What do you think will happen?

From Hunting Monsters

GREECE IN CRISIS

Greece held a general election yesterday but the leader of New Democracy, the largest party, has said that he is unable to form a government. Antonis Samaras has suggested calling new elections as the only way out of the country's political crisis.

New Democracy (centre right) and PASOK (centre left) had dominated Greek politics, but they haemorrhaged support at the election as the public blamed them for the economic storm that has engulfed the country. Where previously one or other party would have been able to govern alone, their combined share of seats in the Greek parliament would leave them short of a parliamentary majority. Together they won less than a third of the vote and are only in striking distance of a majority because Greece gives a sixth of the parliamentary seats as a bonus to the party winning the largest share of the votes, in this case New Democracy; they also benefited from nearly 20% of Greeks voting for parties that failed to secure parliamentary representation.

In Greece if the leader of the largest parliamentary party is unable to form a government, the leader of the second biggest is then invited to have a go. That is Mr Alexis Tsipras, leader of Syriza, an umbrella grouping of various far left groups who are opposed to the EU/IMF bailout and to further austerity measures. Anti-austerity parties won more votes than supporters of the bailout, but they have less parliamentary seats. Even if Mr Tsipras was leading a coherent group that wanted to govern rather oppose things, he would find it impossible to form a government unless he can somehow lure PASOK into a coalition that would also have to include the Greek Communists. As PASOK contested the election on a pro-bailout ticket, such efforts are unlikely to succeed.

So maybe Greece will face another election. Or maybe Evangelos Venizelos of the third-placed PASOK can form a coalition including New Democracy and the small centre left Europhile party Democratic Left. Together these three groups would have a parliamentary majority and their share of the popular vote would not be too embarrassingly behind that of the anti-bailout parties represented in parliament (38.2% v. 42.9%).

If fresh elections are held then Syriza will be hoping to pass New Democracy and gain the 50-seat bonus for being the largest party. Their leader would then be in position to form a far left anti-bailout coalition, particularly if the people who voted for parties that failed to make the country's 3% threshold can be persuaded to vote for Syriza or the Communists. Things would then get very interesting. A Syriza-Communist government would most likely repudiate the EU-IMF deal, cutting the country off from any external sources of funding. The country would then be looking at a disorderly default on its international debts, expulsion from the Eurozone, and at having to balance its government books from its own resources. Given the predilections of the Communists and Syriza, Greece might also withdraw voluntarily from the European Union. I suspect that all this would be accompanied by economic collapse as anyone with Greece with anything that is not nailed down tries to get it out of the country, but either way it could be rather exciting.

More:

Greek election: Antonis Samaras coalition bid fails (BBC)

Greek legislative election, 2012 (Wikipedia; with breakdown of votes and seats for parties elected to the Greek parliament)

Elections Are Fun

In France, exit polls are saying that Francois Hollande has comfortably won the presidential election. Nicolas Sarkozy thus becomes only the second incumbent president of France to lose an election. Hollande will almost certainly call an election to the French parliament to secure a socialist majority there.

Before the election, Hollande had suggested that he would seek to renegotiate the European Fiscal Compact, to introduce some kind of programme for growth and make it less about the kind of budget balancing beloved of conservatives. He also proposed some quite draconian tax increases on rich people. It will be interesting to see whether he delivers on any of this or if his election has any impact on the referendum in Ireland on ratifying the Compact.

In Greece, meanwhile, today's general election has seen support for the two hitherto dominant parties collapse. PASOK and New Democracy have been blamed for the country's economic collapse and their vote has fallen to c. 14% and 20% respectively.

PASOK and New Democracy are now too weak to govern together in a grand coalition without support from the smaller parties who have seen their vote surge. The other parties are however a bit of an ideological dogs dinner, united by nothing other than their opposition to further austerity measures in Greece. It may not be possible to form a government with majority support in parliament. Or perhaps if a government is formed, it will repudiate the bail-out programme and set off on a road leading to disorderly default, leaving the Eurozone, capital flight, and a chaotic economic and political future.

EDIT (based on Nicholas Whyte's comment): The Greek electoral system gives a seat bonus to the largest party such that New Democracy and PASOK should be able to form a majority grand coalition after all. So maybe Greece is not going to disappear down the plughole just yet.

In Germany, meanwhile, state elections in Schleswig-Holstein appear to signal the end of the CDU-FDP coalition that had governed there. The FDP (a party of rightwing liberals, in some ways akin to the now vanished Progressive Democrats of Ireland) in particular have seen their support tumble.

The CDU (the Christian Democrat party of Angela Merkel) may still be able to form a government in Schleswig-Holstein, but it may be a grand coalition with the Social Democrats. This suggests that a left-right coalition could be on the cards at a national level after the next election. Angela Merkel herself apparently remains popular in Germany, her tough stance towards the more profligate countries of the European periphery reassuring voters that their bail-out monies are not going to be squandered.

Armenia too is holding parliamentary elections today, but I am not familiar with politics in that country so I must refer you to this BBC News article: Armenia votes in parliamentary elections

And just to be part of all the election fun, Prime Minister Binyamin Netanyahu of Israel has announced plans to hold early elections in four months time. Elections are likely to lead to a coalition similar to the hawkish one Netanyahu currently heads. I do not know if Netanyahu is planning to synchronise the elections with any kind of military action against Iran.

From Hunting Monsters