The Greek New Year

While Europe relaxed during their Christmas holidays, Greek MPs were unable to elect a new President and a general election has been called for January 25. The opinion polls show Syriza the radical left party with a 3% lead. The Greek parliament has 300 MPs, 250 of whom are elected on a proportional representation basis, but the other 50 are awarded to the party which wins the greatest share of the vote.

In recent weeks Syriza have been toning down their aggressive rhetoric about unilaterally defaulting on Greek government debt, possibly in a bid to gain more moderate votes. In addition if the current polls are correct, Syriza will not achieve a majority of 151 MPs and will thus need to enter into a coalition with a more moderate party. Markets have thus become a little more hopeful another Greek financial crisis will be avoided.

Syriza’s economic policy has 3 strands:

  • A restructuring or forgiveness of much of the €370bn debt owed by the Greek government
  • An end to the austerity measures,  an end to the Troika (the IMF, ECB and EU) oversight of Greek economic policy and increases in wages, pensions and benefits throughout Greece, and

3)      Remaining in the euro

The first could be easily conceded on pragmatic grounds. 80% of the debt is owed to the Troika and it is generally accepted that most of it is unlikely to ever be repaid. However politically, any formal restructuring agreement would set a precedent that Ireland and Portugal might be keen to emulate, and thus be unappealing to the Troika (and Germany in particular who have effective veto power here).

The second and third demands are, however,  not acceptable (to the Troika) as a pair. If Greece wishes to remain in the euro (and polls show over 70% of Greeks wish to stay in the euro) then limits to government spending and deficits are part of what is required of all countries.

In recent days senior German politicians have made it clear that they would not be unhappy if Greece decides to leave the euro. Documents from the 2010-11 crisis that have recently become public show that many in Germany would have been quite happy not to rescue Greece and force it out of the euro then, but it was Angela Merkel that ultimately decided the contagion risks of a Greek exit were too high. This time around the contagion risks are generally believed to be very much lower and that the Eurozone could let Greece go without a wider crisis.

So the end of January and early February are likely to see negotiations to form a Syriza-led government and the end of the March is the deadline by which a new agreement with the Troika over Greek austerity is due. Either Syriza or the Germans will have to blink first!

Beware of Greeks bearing unwelcome gifts this Christmas

2015 could begin with bad news from Greece. The governing coalition has put forward a candidate for the Greek presidency, and has said that if he is not approved by the end of 2014 then they will call a general election. For the last few months the Greek opinion polls show the Syriza party as likely to win any general election. Syriza’s major policy proposal is to call on the rest of Europe to “restructure” or forgive a large part of the money that Europe has lent to Greece. They are threatening that should this not be forthcoming, then they will unilaterally default on their debt, threatening another financial crisis in the Eurozone.

The process for selecting a president is that a candidate must win two-thirds of MPs support – this is 200 out of the 300 Greek MPs, on either a first or a second vote. On a third vote, only 60% support or 180 MPs is sufficient. On Tuesday, on the second vote, the governing coalition achieved 168 votes, essentially just the votes of the parties in the coalition and little support from other parties. The third vote is on December 29. It is not at all clear that 12 more votes can be found for the government’s candidate.

So a New Year election is a distinct possibility. A Syriza victory is also a distinct possibility although it is expected that EC leaders will make speeches making it very clear to the Greek people that a Syriza vote is a vote for chaos. There is little support, particularly from Northern European countries, for the idea of writing off loans to Greece, though Portugal and Ireland will be watching with keen interest, having also borrowed heavily in the wake of the Eurozone crisis.  Syriza would though like to remain in the euro – in effect retaining the asset of the euro membership but losing all the liabilities from their debts. Cakes and eating come to mind!

From a Greek perspective, now would actually be a very good time to default on past debt. After years of savage austerity, the Greek budget is now just in surplus before accounting for debt interest or the repayment of debt. This means that Greece no longer needs to borrow money from anyone to fund itself, and so its level of debt is near a peak. Defaulting now has lots of upside and limited downside from this perspective.

The German word for debt is has very close links with the word for guilt, and Germans would regard a Eurozone country defaulting on its debt as profoundly wrong, threatening the very sanctity of the single currency. There would be a strong move to have Greece ejected from the euro, though there is no legal process for any country to leave the euro.

While the world enjoys its Christmas and New Year holidays, Greek MPs will be determining whether we return to our desks to find a new crisis threatening the Euro.

Democracy – the antidote to Eurozone austerity

Over the last twelve months of Eurozone crisis, the politicians in Europe have in the main been talking to each other rather than their electorates. In fact the conversations have involved Northern Europeans (mostly from Germany) telling Southern Europeans to slash government spending and find ways to collect more tax revenues and the Southern Europeans promising very solemnly that they have always intended to and will do so just as soon as they receive some extra money from the Northern Europeans. The voters have never been asked their opinion either in the North as to whether they want to commit funds to support those in the South, or in the South as to whether they want to go through with the austerity measures their politicians have agreed to. Over the next 18 months there are important votes in France, Greece, Holland and Germany, when the politicians will be courting votes and saying things that are odds with current policy settings.

It is said that in the French presidential elections, in the first round the French vote with their hearts and in the second round with their heads. Well, 30% of the electorate voted for the extreme left or the extreme right in the first round; both reject entirely the idea of deeper European integration and the economic policy of austerity. Further, the centrepiece of Francois Hollande’s platform is the rewriting of the fiscal compact set out in the new treaty to pursue a much more aggressive growth strategy and greater powers to the ECB to lend directly to countries. In this he is on a collision course with Angela Merkel and impact is likely to occur very soon after the May 6 run-off election. The received wisdom is that he will not seek dramatic change to what has already been agreed, and will be satisfied with language that has an aspiration for greater growth without meaningful measures – this would probably the best he would get from Merkel and Germany. The key though is that a clear majority of the French electorate rejected the current policies of austerity.

May 6 is also the date of the Greek general election. The technocrat Papademos who was put into power as the head of a coalition government of the 4 major parties in order to agree the terms and conditions of the Greek bailout, has completed his job and is stepping back to allow normal politics to resume. Northern Europe insisted that all 4 parties in the coalition individually signed up to the terms and conditions of the bailout, in order to prevent any backsliding after the agreement, but there are already problems. Recent polls indicate that 67% of Greeks want to stay in the euro but don’t want the austerity, which can be interpreted as wishful thinking, economic ignorance or that their politicians are allowing them to believe that such a choice exists. It is not clear that those 4 parties would command 50% of the seats in the new parliament, even if they could be persuaded. Already Venizelos, the head of the Socialist party has been floating the idea of Greece going back to the drachma as an alternative to austerity.

The Dutch too are struggling despite being seen as part of the Northern European bloc. The coalition government fell over the weekend because the far right party refused to accept the austerity measures necessary for the Netherlands to get their budget deficit in line with the Eurozone targets. An election now looks likely in Holland.

Once these elections are settled, attention will begin to shift to Germany’s election in September 2013. Here though the politics is reversed, what is popular with the Germans is the notion that the rest of Europe should engage in the austerity necessary to get their public finances in order as Germany has had to earlier this century, so that no further calls on the German purse are made from bankrupt Eurozone nations.

Exposure to the votes of their peoples is going to cause politicians to say and do things that make continued agreement on austerity and bailouts increasingly hard to do.

Elections and political transitions in 2012 – January 2012

This year brings elections or organised transitions in political leadership in Russia, the US, China and France. Such periods can lead to unpredictability in economic policy ahead of these transitions as current leaders seek to avoid bad news in order either to win the election or to go out on a high. Similarly the period immediately after an election or leadership transition is usually one where the leader has most political capital and will generally seek to execute his or her most vital or most cherished policies. These may not necessarily be those policies which are most appropriate in an economic sense but are the most appropriate in a political sense. With so many transitions in such important nations this year, the scope for good politics to triumph over good economics is very large.

The US election is now underway with the Republican primaries firing the starting gun. The two parties are ideologically further apart than at any time in living memory (the phrase “class warfare” is being used a lot), and the Democrat President is unable to get the Republican Congress to agree to anything he wants to do. This year policy is in limbo, US politicians are unlikely to agree on doing anything  with regard to economic policy – this is understood and to some extent accepted by the markets, but action must be taken in 2013 to start reducing the fiscal deficit and the candidates are unlikely to reveal to the electorate just how bad things will need to be in terms of spending cuts or tax increases. In addition, upcoming elections require all candidates to stand up very strongly for American interests in any international dispute – in trade matters this can easily spill over into protectionist policies to “safeguard American jobs”.

In China, a new generation of leaders will come to power just before the US election – at the top level there will be no shocks but there is much manoeuvring still going on for the next level down, who will form the leadership team in five years time. Chinese officials will struggle to allow or tolerate “bad” economic news, and any further weakness of the type seen in recent months may well generate another dramatic stimulus response of the sort seen in early 2009. In foreign and trade policy also, it will be important for the Chinese to be seen to be stoutly defending their interests to safeguard Chinese jobs.

France is the most interesting story with its May Presidential elections. First it means that Sarkozy cannot allow anyone to leave the euro before the elections, because all his efforts over the last two years to “save the euro” would have visibly failed – therefore more summits and buying of time with new initiatives is very likely. However were he to remain President (unlikely from the current opinion polls), he would never have to face the French voters again – he could afford to try to be a European statesman and actually may be prepared to adopt a more German solution to the euro crisis, even at the expense of traditional French interests. By contrast markets might get a nasty shock were his main challenger Francois Hollande to win the Presidency. He is a fairly unreconstructed socialist, and would have few political soulmates in Europe, and has already declared that the current policies of austerity and institutional change to force countries into more restrictive fiscal policies are unacceptable to him. It is difficult to see Angela Merkel willing to give much of the ground that Hollande would require in order for France and Germany to continue to lead the efforts to save the euro. Either way the French election looks likely to be absolutely pivotal in determining which way the euro crisis gets resolved.

Amidst all this, the UK looks to be a rather stable place. The coalition looks set to soldier on – the Liberals cannot afford to leave since the ensuing election would see them almost wiped out, whilst Cameron benefits from pursuing the economic policies that he believes is necessary but seeing the blame laid on the Liberals. The economic policy of steady austerity has been set for the next few years and no change will be considered until much closer to the planned 2015 election. For Cameron, current economic policy is both economically and politically appropriate and he stands in a place that many of his fellow world leaders would wish to be.