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Does Greece’s Election Really Matter?

Friday, June 15, 2012

The election will just postpone Greece’s inevitable default on its official debt and its unavoidable euro exit by a month or two.

On June 17, all eyes will be on Greece’s second parliamentary election following an earlier May 6 election that did not allow a government to be formed. With bated breath the world will be watching to see whether Antonis Samaras, leader of the conservative New Democracy Party, can ward off the challenge for the prime minister’s job from Alexis Tsipras, the candidate of the radical left and the bête noire of the financial markets.

In the grand scheme of things, however, this election may not really affect Greece’s continued membership in the euro. Whoever wins the election will inherit a deeply troubled country that is in no condition to meet its budget commitments to the International Monetary Fund and European Union. All that an election result will do is postpone Greece’s inevitable default on its official debt and its unavoidable euro exit by a month or two.

The sad reality is that Greece’s economy is in a state of true collapse under the weight of an overly restrictive IMF-EU budget adjustment program within a euro straightjacket that precludes currency devaluation to boost Greece’s external sector. Over the past three years, Greece’s GDP has contracted by 16 percent while its unemployment has risen to 22 percent. Worse yet, the Greek economy is on track to contract by an additional 7 percent in 2012, which will cause the country to sink further into depression on a monumental scale all too reminiscent of the Great Depression in the 1930s.

Greece’s economy is in a state of true collapse under the weight of an overly restrictive IMF-EU budget adjustment program within a euro straightjacket that precludes currency devaluation to boost Greece’s external sector.

The new Greek prime minister will find that, as a result of a collapsing economy, Greece’s public finances are in much worse shape than the IMF had foreseen earlier this year. This is reflected in declining tax receipts and in mushrooming government payment arrears that are now in excess of 90 days. He will also soon find that, as a condition for its next loan disbursement, the IMF will be asking Greece to identify and obtain parliamentary approval for 5.5 percentage points of GDP in public spending cuts for 2013 and 2014. And he will know full well that, with more than 60 percent of the Greek electorate vehemently opposed to further fiscal austerity, he will risk social anarchy if he persists in getting parliament to approve further IMF-mandated hair shirt fiscal austerity.

Greece’s only hope for avoiding default and exiting the euro is for the IMF and EU to substantially soften the terms of their bailout program and to provide Greece with additional funds beyond those already committed in order to finance any budget gaps that would result from such a softening. However, the chances of this occurring have to be remote given Germany’s oft-expressed fear of the damaging message that this would send to the rest of the periphery, and Germany’s fear that Greece would become a bottomless pit for its Treasury. German Chancellor Angela Merkel knows that her room for maneuver in cutting Greece some slack is highly constrained by the fact that 69 percent of the German electorate thinks that Greece should leave the euro.

Desmond Lachman is a resident scholar at the American Enterprise Institute.

FURTHER READING: Desmond Lachman also writes “Who Lost Greece?” “Europe’s Future on the Ballot,” and “The Next and More Serious Phase of the European Crisis.” John H. Makin asks “As Greece Leaves, What Happens to the World's Economy?” Sharon Kehnemui ponders “EU bailout big enough to pull Spain from the muck?” Vincent R. Reinhart and Carmen M. Reinhart say, “Experts react to Europe’s bailout package for Greece.”

Image by Darren Wamboldt / Bergman Group

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