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June 18, 2012

The Greek Election Solves… Nothing

Financial markets staged the usual relief rally overnight at what looked like good news from Europe. It appears that the pro-bailout parties New Democracy and Pasok won a parliamentary majority in Greece, so that if they can agree on a coalition, Greece will have a government that can work with the EU.

But these relief rallies have been fading faster as investors grow more skeptical about Europe: the good news somehow never turns into real progress toward fixing the mess. The Greek elections are more of the same and the news wasn’t a day old before the market euphoria died.

There are three reasons why the Greek election doesn’t help. First, Greece’s economic problems were overwhelming and insoluble before the election, and they are overwhelming and insoluble now. The bailouts have been large enough to antagonize opinion across Europe, where Greeks are seen as shiftless, incompetent liars — but they are neither big enough nor well enough designed to give Greece a reasonable chance of emerging from its vale of tears in a sustainable time frame. Nothing in yesterday’s vote changes that. Greece is still headed over the cliff.

Second, the elections will not give Greece a strong government. It is not even clear that they will give Greece a government at all, but if Pasok and New Democracy agree on terms (and at the moment they don’t) a new coalition will lack the mandate to impose the painful measures and reforms that Brussels demands.

Although New Democracy and Pasok have a majority of seats in the new Parliament, they did not get the majority of votes. The party that gets the most votes in Greece gets a “bonus” of 50 seats (out of a total of 300 seats) in Parliament. New Democracy got 29.6 percent of the votes and 129 seats with the 50 seat bonus; Pasok got 12.3 percent of the vote and 33 seats. A third not-dead-set-against-the-bailout party, Democratic Left, got 6.2 percent of the vote and another 17 seats. Add them together and you get 179 seats, a solid parliamentary majority, but only backed by 48.1 percent of the popular vote.

A slim majority of Greeks appear to have cast their votes for parties pledged to fight the bailout. And the “pro-bailout” parties all ran with promises to fight for better bailout terms.

Under normal circumstances in Europe, governments like this work pretty well, just as in the US presidents who get elected with less than 50 percent of the vote can still govern effectively. But the circumstances in Greece are not normal. A pro-bailout government is going to have to pass law after law cutting wages, cutting jobs, cutting benefits. And (unless the other Europeans develop a sudden desire to send much more money to Greece and to drop most of the conditions they have so far imposed), the new government won’t be able to negotiate the kind of wholesale changes in the bailout that a large majority of Greeks want. Instead, the government will be handing out blood, toil, tears and sweat, and the results of all these cuts and reforms will be more pain, more unemployment, more poverty for several years.

Greece is in this mess partly because its political leadership is both weak and addicted to patron-client politics. A Greek politician is or at least tries to be like Don Corleone to those around him: he does people favors and they kiss the ring. If the Don has no more favors to give, he loses his power. Think of Fredo instead of Michael, and think of him trying to run the family without any money. That is more or less where Greece is right now.

The third and final reason why the relief rally ended so quickly: Greece was the curtain raiser for the European meltdown, but it is ultimately a sideshow. Europe has moved on now; we are worried about Spain and Italy now. The Greek election doesn’t solve any of Europe’s real problems. Greece can and probably will make Europe’s problems worse, but nothing that happens in Greece can save the euro.

As interest rates on Italian debt passed 6 percent (the crisis threshold) and for Spain they passed 7 percent (apocalyptic), Europe edged a little closer to the precipice this morning. The Greek election went as well as could be expected, and better than feared, but Europe’s problems just keep getting worse all the same.

Posted in Economics & Business, Europe, Quick Takes
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  • Eurydice

    How uncooperative of the Greeks. If they’d only voted against austerity the rest of the EU could have stayed on its high horse and thrown out the worthless scum to face a much deserved death.

    But all the speeches and press and political table-pounding by the EU leaders demanded that Greeks vote for austerity, or else. So now the EU powers have what they say they wanted – what are they going to do about it? Are they going to say “Ooops, sorry. We meant it’s ‘or else” no matter what you do.”?

  • http://facingzionwards.blogspot.com/ Luke Lea

    Reasonable analysis. Probably true. Meanwhile, what is going to happen in China? Does a state owned banking system have a better or worse chance of managing it crisis with fiscal and monetary policies. It has more freedom to operate obviously but are its options any better? Love to hear your opinions.

  • Mark L

    Proving yet again — this time in the modern era as opposed to Ancient Times — that the real problem is not Greeks bearing gifts. It is gifts bearing Greeks.

  • BJM

    Think of Fredo instead of Michael, and think of him trying to run the family without any money.

    That is more or less where Obama is right now as well.

  • crypticguise

    Exactly! Nothing is solved. Greece is bankrupt. Greek politicians are both corrupt, incompetent and helpless because THERE IS NO MORE OTHER PEOPLES MONEY.

  • RHD

    Eurydice seems to be living in a parallel universe. The problem is that Greece (and Spain and Italy and Portugal and Ireland and even France) have not been sufficiently productive for quite some time to pay for the standard of living that their citizens have enjoyed. The difference between what those economies produced and their citizens consumed has been paid for by borrowing. Now that the lenders fear that they won’t be repaid, they have become leery of lending more, and are demanding a steep price for assuming that risk.

    The preferred solution by the lender-nations is for the debtors to reform their internal markets (labor, finance, you name it) and regulatory schemes to improve productivity and remove impediments to economic growth. The debtor nations have done some of that, but mostly only of the budget-cutting kind (France under Hollande looks like it may start undoing even the little it did on that score). Reforms of the magnitute needed in Europe are hard, and cause lots of pain (the pain being commensurate with the size of the problem). As with most hard things, if if ever happens, it will only be when there is no other choice.

    The preferred solution by the debtors is for the lenders to keep the party going. Understandably, the lenders find that unsatisfactory. From their perspective, it would only make sense if the debtors would use the continued party-time to reform, which in this case means making their economies sufficiently productive to pay for what their citizens consume. No one has much confidence that will happen — from a political angle, it’s definitely a game with clear losers, resulting in a fight between all the heretofore protected groups within each debtor country about who will bear the pain of a reduced standard of living. All of the debtor countries have gigantic public sectors, whose members are adept at preserving their turf.

    The problems facing Europe are intractable, deep seated and long-term. As WRM rightly says, the Greek election solved nothing.

  • Contrarian View

    Walter, you do realize that your metaphor, Fredo running the family with no money, is also a perfect description of the current occupant of the White House?

  • http://www.wikistrat.com TMLutas

    A massive education of the difference between aims and means available is necessary for the greek polity. The quickest method is deceptively simple, stop automatic spending at a particular day and have the greek parliament repass all its previous promises in order of importance. When they run out of money, they stop and all the lesser priorities are simply not funded.

    The great populist weapon to date has been the perception that those with clout are going to be taken care of even though their priorities are manifestly less important than others who are getting thrown under the bus and having sacrifice demanded of them. This method would take that populist weapon away by taking the government 100% off autopilot. Only then will Greece have a chance to move forward.

  • http://permanentpress.blogspot.com Bryan Caskey

    “A Greek politician is or at least tries to be like Don Corleone to those around him: he does people favors and they kiss the ring. If the Don has no more favors to give, he loses his power.”

    I agreed with your article, but the analogy is wrong. A Mafia Don is powerful because others fear him, not because he’s able to dole out favors.

  • vanderleun

    Over at Zero Hedge is an amusing take on this long and now officially boring story….

    The Tiresome Eurozone Soap Opera Has Entered Re-Runs

    “The Eurozone “drama” is now in re-runs and I for one am switching channels. Nothing will change until some critical part of the worm-eaten, corrupt construct of artifice and denial collapses in a heap. Until then, all we have is replays of the same boring plot lines….”

  • Eurydice

    #RDH – I’m not living in a parallel universe; I agree with everything you’ve said. But you’ve neglected the part the equation that includes how the lenders also want to keep the party going because they don’t want to acknowledge the possibility they won’t get paid. Then there’s the part where the lenders were also borrowers – they leveraged themselves to unacceptable levels so they could continue lending to the PIIGS.

    But my point isn’t to excuse the actions of Greece, but to ask what’s the point of this constant screeching and haranguing? The facts today aren’t different from the facts yesterday or the day before. What’s the point of pretending the whole world is holding its breath over the Greek elections when the consensus is the Greeks should all starve to death in the dark no matter what?

  • http://www.pacrimjim.com PacRim Jim

    Beware of Greeks bearing grifts.

  • Cunctator

    #4 BJM – Obama as Fredo is an interesting image. So, is it Obama sitting on the sidewalk in tears as the international economy disintegrates: or is he sitting on the curb crying as reality gores his chances of re-election? And, who takes Obama fishing?!!!

  • Jim.

    @Eurydice-

    The olives will still grow. The goats will still find forage on the hillsides. There will still be music, for those who know how to play it themselves. That slower pace of life will survive — it will simply be attended by less material plenty.

    There will be no more loans from abroad. There will be fewer BMWs from Germany, fewer positive-air-pressure machines from America, less plastic junk from China.

    That will not change — that cannot change — that should not change, until Greeks (and you probably know some who will) take their fate into their hands and start to create goods and services the rest of the world wants, in an efficient manner and for a competitive price.

    Life goes on, one way or another. Quieter and with less consumption, or more active and productive, with more material wealth.

    There may come a time when people can pick the disadvantages they prefer. “Paradise”, consumption without production, will not be an option.

  • teapartydoc

    Things are pretty bad when things keep getting worse even in the absence of action.

  • Eurydice

    @Jim #14 – Yes, very idyllic and la, la, la. There are over 5 million people living in Athens – they have no goats foraging through the olive trees on thyme-covered hillsides. And nobody there is worrying about where their next BMW or plastic junk from China is coming from. They’re worrying about whether they’ll have electricity, food and medicine.

    And yes, I know many Greeks who already create goods and services the rest of the world wants and have been doing so for a long time, even against the obstacles put up by the Greek government. However, they have to suffer the same fate as the rest of Greece. Nobody there is denying this, so please spare them the smug condescension.

  • richard40

    Greece needs a Tea Party, to responsibly reform at least one of their 2 parties. Their problem is their leftist party is as bad or worse than Obama, while their conservative party is as bad as Bush. At least in the US, thanks to the reform efforts of the Tea Party, only one of our 2 parties is now irredeemably corrupt. (Actually I should not say the dems are irredeemably corrupt. They are just iredeemably corrupt if Obama stays in charge, just like the repubs could not reform until Bush was gone and discredited. If the dems got their own version of the Tea party, and was able to purge their corrupt elements, like Obama, Pelosi, Reid, and the idiots in CA and Ill, then our country could improve rapidly.).

  • richard40

    “So, is it Obama sitting on the sidewalk in tears as the international economy disintegrates: or is he sitting on the curb crying as reality gores his chances of re-election?” 13. Cunctator

    Obama will not doing either of those things. Instead he will still be blaming Bush (or for variety, anybody else he can think of). If Obama is turned out of office in disgrace, he will still be blaming Bush 20 yrs from now.

  • http://www.facebook.com/profile.php?id=100003406250585 Elena

    Just finished reaidng your article on the situation in Greece. I’m very impressed by how well you illustrated the angles you chose to cover, and I’m a little sad that you couldn’t cover everything.I also feel kinda bad. When I finished reaidng the bit where you described the possible motives for why people would want the Greek economy to flop like a fish out of water, the word Cool! went through my head. I’m a poor, starving college student and I have nothing against Greece. I think I thought it was cool was because clever motives like that fascinate me. Yes it’s evil, yes it’s corrupt. But I’ll be a monkey’s uncle if it isn’t clever.And while I was thrashing this out with myself, I got to thinking, What if it’s all three? All of it could, in fact, be fueled by racism, and profit is simply a bonus.Start with number 3: Hatred for Greece. How can German and the rest of Europe make an example of the Greeks and put them, as I’m sure they would say, in their place ? Someone notes for whatever reason that Greece is a hot tourist spot and that large profits could be gained from the islands. So someone suggests that they take financial control of the islands. But how?Credit default swaps. They start taking out fire insurance on their neighbor’s house. They get it for a low cost and start betting against Greece’s financial situation. If the country defaults, they just won the lottery, a week’s worth of money at five or six poker tables (each), and every horse race for the next century. And where does this fortune go? Why, to buying footholds in Greek tourism. These footholds are quickly followed by butt-holds, more commonly known as recliner chairs, couches, and what have you.Racism is more than just a motive, though: It’s also a means. If I understood correctly, Greece is using the Euro and the accompanying prices, but their wages haven’t changed a bit. People are getting payed the same amount, but prices got jacked up. So people are in a really crappy financial situation and desperately need outside help.And here figures in the racism. Keep the rest of Europe poised against Greece and they won’t help at all. With a corrupt government currently in place, the economy will sink lower and lower until the country defaults because no one wants to help these heathens .How the corrupt government got there I don’t know. It may have been planted, or it might simply be what a friend of mine would call a happy accident . At least, from the point of view of those wanting Greece to fall. Either way, it’s the wrong thing in the right place at the right time. and Cool! just went through my head again. I feel bad.