We’ll probably get the final word today, but I think it’s safe to say there will not be a Greek government forming out of the most recent elections. After the top three vote-getting parties each tried and failed to form a government, the Greek President made one last plea to amass a government of national unity among a clatch of parties. However, The Radical Coalition of the Left, or Syriza, never attended the talks. They stand to gain big from new elections, where polls show them in the lead. Talks were scheduled to continue today, but word just came down that the moderate Democratic Left party has pulled out of talks. The Democratic Left are a splinter group from Syriza with a somewhat more moderate bent. But they refuse to join a coalition with the legacy parties that negotiated the bailout for Greece. Democratic Left said they could not form a government without the participation of Syriza:
“No unity government can emerge,” Fotis Kouvelis, head of the Democratic Left party, told Greek television.
“A government without Syriza would not have the necessary popular and parliamentary backing,” said Mr Kouvelis.
The upshot of all this is new elections, which would take place on June 17. The likely outcome of this is an end to Greece’s use of the euro, which is nearing reality. A caretaker government will have to preside over a couple of deadlines for budget cuts. European leaders have already administered what amounts to a fine on Greece for their political unrest, holding back €1 billion of a scheduled €5.2 billion payment. The budget must be cut by far more than that by June, but elections are likely to come back with a coalition that rejects austerity. And though top investors don’t want to contemplate it, leaders in Germany, at least, are speaking openly about how Europe will survive without Greece in the Eurozone.
You get the sense that there’s a large game of chicken going on. Greece would experience short-term pain (though, I would argue, actual long-term hope) from a Eurozone exit. And as for Germany and the rest of Europe, the scenario could, per Krugman et al, work out like this:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
This has already had an impact; global stocks are down and Italian and Spanish bond yields are up.
So a Greek default and departure is something everyone and no one wants. You definitely get the feeling that this is the end of the beginning for the euro experiment. But the idea that this is the end in itself could just be a bluff.