New Democracy (ND) just barely pulled ahead of the anti-bailout, left-wing Syriza in the election on June 17th. According to the Greek constitution, the party in first place wins 50 bonus seats in parliament. With roughly 85% of the votes counted and Syriza having conceded defeat, it looks like ND will have 130 seats, Syriza 71, Pasok 33, the Independent Greeks 20, Golden Dawn 18, the Democratic Left 16 and the KKE 12. The markets will view a ND victory as good news, but is it really? I expect the rally to be short, as this election has just returned us to the utterly unsustainable status quo.
ND wins—now what?
The only thing that the leaders of the main parties in Greece can agree on is that Greece needs to form a government, and quickly. This represents a significant shift compared with the May 6th election, when it was clear early on that most parties were more interested in party politics than the national interest (ND spent only six hours trying to form a coalition, and Syriza in particular was intent on pushing the country to new elections).
Once Greek President Karolos Papoulias gives New Democracy the green light to form a government, ND will have three days to attempt to form a coalition. Syriza will insist on remaining in opposition, and who can blame them. Syriza can stand on the sidelines and soak up new supporters with its anti-austerity rhetoric as the new government struggles to comply with the terms of the bailout. This could put Syriza in position to win the next election once this government collapses. Pasok initially said that it would only participate in a coalition with ND if Syriza also joined as a partner. Since then Pasok has softened its rhetoric and indicated that it would prefer a coalition to include Syriza but its priority was to not leave Greece ungoverned. I expect an ND/Pasok coalition to emerge, with the two parties commanding around 163 seats in parliament (151 are needed for a majority). The Democratic Left may also be brought into government to share the burden of implementing the terms of the bailout.
Then the Hard Work Starts
Once a coalition is in place, the really hard work will start. The ND-led government will be immediately visited by troika representatives for a delayed quarterly review. Greece is also supposed to find around €11bn in new savings by June 30th to hit the targets agreed in the second bailout. ND has said that it plans to renegotiate the terms of Greece’s bailout, but it is unlikely there will be a full renegotiation. More likely, Greece’s fiscal targets will be relaxed slightly and some minor measures will be included in the bailout to attempt to boost growth. Even if the terms of the bailout are relaxed somewhat, there is no reason to expect a ND/Pasok government to succeed in implementing the memorandum of understanding in the face of such austerity fatigue.
Greece will therefore remain in its downward austerity/recession spiral. As the government is forced to implement further austerity, social unrest will rise and opposition to additional retrenchment by MPs will cause the government to collapse by the end of this year. Greece has entered a new period characterized by such a cycle of elections, additional austerity, social unrest and new elections. Increasingly squeezed by austerity measures, the Greek electorate will eventually put in place a government willing to consider alternatives to the current path of retrenchment and bailouts and will choose to exit the EZ.
This post originally appeared at Economist Meg and is posted with permission.