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.