A Greek Election Result that Signals the End of the Euro Crisis
Greek voters delivered a resounding victory to Prime Minister Alexis Tsipras and his Syriza party on September 20, despite a record low voter turnout of 55 percent. Syriza's 35.5 percent of the vote replicated its achievement in January 2015. Compounding his victory was the failure of the leftwing breakaway Popular Unity party under former energy minister Panagiotis Lafazanis to cross the threshold for parliamentary representation (3 percent). At age 41, Tsipras looks set to dominate Greek politics for the foreseeable future. The additional inability to exploit Syriza's eight months of failure and mount a comeback by New Democracy and Panhellenic Socialists (PASOK)—the two traditional Greek parties of power—highlights the desire of Greeks to break with the past.
Having achieved this political success, Tsipras must do more than deliver political stability, growth, debt relief, and an end to the austerity and reform program imposed by the European Commission, the European Central Bank, and the International Monetary Fund (IMF), known as the Troika. With this mandate he needs to end Greece's traditional political and economic system to succeed.
Greece's euro area creditors are no doubt happy that Tsipras, whose mercurial behavior has been a source of frustration for months, must now implement the deal he negotiated rather than oppose it from the outside. The earlier proposal for a Greek exit from the euro area by German finance minister Wolfgang Schauble now looks particularly ill-advised. The election result suggests that the governing coalition between Syriza and the rightwing nationalist Independent Greeks (ANEL) party continues, according to press reports. It would perhaps have been even better if Syriza had found a more centrist party, but ANEL offers Tsipras a majority in return for very few political concessions. Expanding the coalition further with the anticorruption party Union of Centrists might suit Tsipras, but it is not required and thus not likely.
Because the Syriza-ANEL government succeeded in the negotiations with the Troika this year, the same coalition should be able to satisfy the Troika also in the future. This coalition can be formed quickly, minimizing delays in adopting the program to only a few weeks.
Indeed for the first time since the crisis began in 2010, a clear elected parliamentary majority favors the Troika program. More than 80 percent of the parliament backs the program (figure 1), a level approximating the long-standing support for the euro in general. Thus it is now clear in Greek politics that if you are in favor of the euro, you are also in favor of the Troika program. The extreme right Golden Dawn and extreme left Greek Communist party were flat in their electoral votes, despite recent refugee arrivals and economic crisis. Their failure to capitalize on the chaos of recent months is encouraging for Greece and Europe. It certainly ought to calm alarmist predictions about another populist wave of politics in Europe following the recent refugee influx.
Following the elections, the tacit agreement between the Greek government, the euro area, and the IMF will probably be implemented quickly. The Greek government's agenda will hopefully include an attack on corruption and systemic tax evasion, while hopefully the euro area will grant Greece enough debt relief through interest rate and debt maturity changes to keep gross financing requirements below 15 percent of GDP, enabling the IMF to sign off on the deal and enter into it both financially and as an overseer of reform progress.
Given the higher cost of IMF loans, however, both Greece and the euro area have an incentive to limit future IMF financial contributions while maximizing European Stability Mechanism (ESM) financing. The IMF is unlikely to contribute its usual one third of the total bailout. An amount slightly above the token 10 percent in the Cyprus bailout seems more likely. Once this next round of restructuring of the euro area Greek debt holdings is in place, the Greek government will likely regain private market access quickly. To make that possible, the existing euro area debt holding should be treated as junior to new Greek government debt.
This election result signals an important milestone for the euro area. Despite all the high octave advice by prominent American economists, the Greek people prefer to stay in the euro and prefer to be ruled by a government belonging in the EU mainstream. This was a vote in favor of stability, highlighting how crises in mature democracies do not necessarily yield ever more radical politics but rather a yearning for normalcy.
No other euro area country is likely to do as poorly economically as Greece or be hobbled by a political system as dysfunctional as the one in Athens. The fact that a Grexit didn't occur suggests that an exit is not likely to happen anywhere else. What crystallized Greek sentiments was the threat of a banking system shutdown. The euro area has no army to send into secessionist states, but it did not need one. This Sunday's election results therefore probably marks the political end of the euro area crisis. A wave of populism arising from the economic hardships are not taking over Europe.