Clear skies not yet ahead – implication and outlook of Greek election
The June 17th election in Greece turned out pretty much as expected. All eyes now turn to its implications and the several concomitant steps that follow. Many are calling it a non-result since the people voted (with only a disillusioned 60% participation) in similar fashion to the first election in May (despite and perhaps because of the slap-gone-viral, Golden Dawn will raise its swastika flag in parliament for the first time ever). This non-result will achieve at minimum what we’ve anticipated; it will for now calm fears of systemic collapse and provide much-needed stability for the financial markets. Still there are major headwinds facing Greece and the future of the Great European experiment:
First, Greece now faces the task of forming a government. It is likely New Democracy (ND) and PASOK will form a coalition government with enough seats in parliament to have a majority, but there is already speculation that PASOK wants Syriza to be included, which brings us back to the potential for another failed attempt at political stability and a possible third election.
From the Telegraph – Look, after all, at the actual results. Greece has repeated itself, only more emphatically, declining to give any party a majority. In Europe’s palaces and chancelleries, the hope is that the two old parties, PASOK (corporatist Left) and New Democracy (corporatist Right), might form the core of a pro-bailout coalition: between them, they have a bare majority. But PASOK is indicating that it doesn’t want to join any coalition without SYRIZA (populist Left), which in turn says it won’t join any government that accepts the EU’s cuts package. If no coalition is formed, what next? A third election? A fourth?
Second, while all major parties agree on the need to restructure the terms of the original bailout, it appears Germany is unwilling to provide Greece the much needed relief. All they seem to be offering is an extension on the time to maturity, which will offer at least some relief nonetheless. The market will pay great attention to how this situation of realpolitik plays out, hoping for a compromise that is vigilant but fair for both sides.
From BBC – German Foreign Minister Guido Westerwelle,
We want Greece to stay in the euro; we want Greece to continue wanting to belong to Europe. But Greece will decide now on its own path; you cannot stop anyone who wants to go. What we cannot accept is the agreements that have been made being declared null and void. There can’t be substantial changes to the agreements but I can imagine that we would talk about the timelines once again, given that in reality there was political standstill in Greece because of the elections, which the normal citizens shouldn’t have to suffer from. But there is no way out of the reforms. Greece must stick to what has been agreed.
Lastly, the market will focus all of its attention on how Europe tackles the grand issue of indebtedness. Anything but absolute fiscal integration to provide the necessary backstop on debt will be viewed as a failure. The world knows what is needed to salvage the European experiment and that comes in the form of “federalizing” Europe a la Niall Ferguson:
So what is to be done? If Alexander Hamilton were alive today, he’d advise the creation of a federal system much more like the U.S. Constitution than the unworkable Articles of Confederation. That would mean three things: a European banking union complete with Europe-wide deposit insurance, the recapitalization of ailing banks with funds from the new European Stability Mechanism, and some kind of scheme to convert part of national debts into euro bonds backed by the full faith and credit of the EU.
As the picture painted above illustrates, much remains to be seen. And in the meantime, the markets will focus on European leader’s ability to knock out each item one by one, because a realistic timeframe for entire completion of the checklist is a long and arduous year or two. In that time, I wouldn’t be surprised for market action that consists of more erratic week-long market up and down swings. Investing with the likelihood that Europe will do what is needed, but being prepared for the volatility along the way… the second half of the year is going to be a bumpy ride.