The third-place party in the Greek elections, PASOK, has been given the opportunity to form a new government, after the first two parties failed in their efforts. Nobody expects PASOK to be successful, meaning that new elections will ensue, probably on June 17. By that time, decisions will need to be made on bailouts and budget cuts, and there will be no government in place to do it. This puts the bailout plan in significant peril, as well as Greece’s place in the eurozone.
After Greece’s May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn’t get the money, it would eventually have to print its own.
Greece’s growing turmoil is the culmination of a radical austerity experiment and botched economic overhaul that have pushed the nation to the brink of social and political breakdown. The story of the ill-fated bailout suggests that forcing deep austerity on individual member states won’t save the euro and may worsen its crisis.
Above all, Greece’s example illustrates the conflict between Germany’s tough terms for aiding other euro members and the amount of pain other societies can bear. Greece’s fate shows that what it takes to sell bailouts to a skeptical German public can be politically calamitous in Europe’s indebted south.
In fact, Germany has already set in motion the events that will lead to a Greek exit, and not just rhetorically, with threats of kicking Greece out of the euro in the air. Athens is supposed to receive €5.2 billion in bailout funds today, but eurozone ministers decided to hold back €1 billion of that, as a kind of protest to the situation in Greece. So we’re well on the road to default.
At the same time, Germany is using a carrot with the stick. They are suggesting that they will relax the timetable for payments by Greece, as long as a pro-bailout government comes into power.
But German officials signaled Wednesday that they may be willing to relax some of the nation’s payment deadlines if a pro-bailout government comes to power, still an uncertain prospect. They may even be willing to consider reducing the interest payments on Greece’s emergency loans, sweetening the deal without abandoning any of the fundamental overhauls hey say Greece needs to get its economy on track [...]
“It’s very important that Greece fulfills all the rules and agreements they have made in the last months. It’s very important for the stability of the euro,” said Norbert Barthle, an ally of German Chancellor Angela Merkel who is the parliamentary budget spokesman for her party, the Christian Democratic Union. “We decided on a second aid program for Greece just a few months ago. We are not so fixed on all the times in this program and all the conditions in this program, but we have to believe in the fundamental aims and we have to believe that Greece itself will do its part.”
This is a sign of weakness from Germany. For all the bravado about them being able to muddle through without Greece in the euro, surely they know that a eurozone exit would cascade to bigger problems in places like Spain and Portugal and Ireland.
And this is not the only area where Europe, led by the Germans, are relaxing their terms. The Wall Street Journal reports that Spain will be allowed to slide a bit on the budget rules negotiated previously.
Euro-zone governments are expected to give Spain more leeway to meet its budget-deficit target next year, according to officials involved in the discussions, in a sign they intend to shift away from rigid enforcement of the currency bloc’s budget rules.
Austerity will still be the guiding principle of European fiscal policies. But the likely Spanish move suggests the rules will be adjusted in some cases to account for the fact that when economies go into recession, their budget deficits usually rise.
It’s definitely a step in the right direction, though this wouldn’t allow for, say, a massive stimulus program to boost demand. And on the monetary front, things look stuck. But I see this as the Germans coming to terms with the fact that their policies have failed, and that the governments they have forced into recession and depression are on the verge of not taking it anymore.