ANALYSIS:If New Democracy and Pasok can form a government they will have little time to convince Europe that things are changing, writes DAN O'BRIEN
GREECE’S PRO-BAILOUT parties will have little time and need a lot of luck to form a government. The options for Greece and the euro zone are narrowing rapidly. To see why, consider the economic and political background to the saga that is shaking the foundations of Europe’s post-war order.
When Greeks went to the polls on October 4th, 2009 – just 32 months ago – all seemed normal. Although their economy was rattled by the financial-economic earthquake triggered by the collapse of Lehman Brothers a year earlier, Greece’s recession had been milder than the average in Europe. The oft-repeated point that Greece has suffered five years of recession very much overstates the duration of the crisis, if not its more recent depths.
The biggest upheaval prior to the election in 2009 had been a wave of riots caused by the killing of a teenager by police the previous winter.
Although always-high youth unemployment was a factor in the unrest, it was more social in its origins than economic.
But all was to change very quickly. The Pasok government was sworn in on October 7th, 2009. It found the budgetary position was unimaginably worse than its New Democracy predecessor had even hinted at. Not only were the public finances out of control, but it became clear that they had been for years. Instead of a manageable public debt pile, there was in fact a mountain of debt.
When bond traders woke up to this reality in early 2010, Greece was shut out of the market. At an emergency EU leaders’ summit on February 9th, the euro zone’s no-bailout clause was effectively ditched and the rest of Europe reached into its pocket to come up with cash to bail Greece out. Europe’s sovereign debt crisis had begun. And so began Greece’s economic crash. If the country’s economic performance had not attracted a second glance up to that point, the world has been watching closely since.
Confidence collapsed in early 2010. Households reined in spending. Companies put investment plans on hold. Public spending, which had soared in the year prior to the October 2009 election, went even more sharply into reverse. Although some progress has been made in cutting the government deficit, it has been limited, and all the while unemployment has sky-rocketed.
Stories of appalling human misery abound.
The economy has now been in freefall for 2½ years, broadly similar – in time and magnitude – to Ireland’s collapse in 2008-10. Unlike Ireland, where a burst property-credit bubble did much of the damage and most sectors of the economy are broadly efficient, Greece’s economic woes look more akin to those of central and eastern Europe countries after decades of state socialism.
When communism collapsed, it was incontestable that a very large proportion of economic activity had been generated unsustainably by the state. When that evaporated in the early 1990s a brutal shake-out took place over half a decade. Economies contracted massively. Unemployment soared. State spending – on pensions, public workers’ pay and health – was slashed. Export sectors in these previously closed economies had to be built almost from scratch.
Now look at Greece today. Among the 27 members of the EU, it exports less than any other country relative to the size of its economy. Most activity is domestically focused. It is now clear that unsustainable state spending artificially puffed up the economy, much as had happened in communist countries.
While Greece may not have as much to do to create a functioning market economy as ex-communist countries did, its politics do not augur well for recovery.
The most successful former communist countries were mostly the ones where the quality of governance was best. When governments showed they were serious, foreign investors took them seriously. Waves of investment rolled in. Foreign companies in those countries played a crucial role in generating sustainable economic growth. It is difficult to see Greece attracting much foreign money until it gets its political act together.
Yesterday’s election provides little evidence to suggest that this is happening. Despite the real threat of Greece being ejected from the euro, one in two voters plumped for parties who advocated starting an unwinnable battle with the rest of Europe.
Last night, Pasok’s statement that it would not go into government without the extreme-left Syriza looked bizarre even before the latter said it would stay in opposition.
With an economy that could be in contraction for years to come and a polity seemingly incapable of providing effective and stable government, the current trajectory is not sustainable.
One option would be to renegotiate radically the terms of the bailout, with wholesale debt forgiveness financed by taxpayers in other European countries. But even if that happened, it would not suddenly lead to a blooming economy.
There would still be a big deficit to close, the shakeout would continue and the “structural” reforms that almost all observers believe are necessary would cause disruption before they generated gains. Even if there was an unshakeable economic case for radically altering course, core Europe may simply conclude that no amount of help will strengthen Greece in order that it is not a threat to the entire euro edifice.
At that point, ejecting the country from the currency zone becomes the least bad option.
If New Democracy and Pasok can form a government, something that appears possible, at least on the basis of the likely parliamentary arithmetic, they will have little time to convince their European partners that things are really changing – both politically and economically.
With so many other weaknesses in the euro zone, it may not even matter. The crisis began in Greece. It could just as easily come to a crashing end elsewhere.