Greek election sets up long, hot eurozone summer
World leaders will be keenly watching fresh elections in Greece next Sunday that could herald its exit from the eurozone, with potentially dire consequences for Europe and the global economy.world Updated: Jun 10, 2012 08:47 IST
World leaders will be keenly watching fresh elections in Greece next Sunday that could herald its exit from the eurozone, with potentially dire consequences for Europe and the global economy.
"Events in Greece could trigger financial fright in Spain, Italy, and across the eurozone, pushing Europe into a danger zone," Robert Zoellick, World Bank president, warned in the Financial Times on June 1.
The summer of 2012, Zoellick said, "offers an eerie echo of 2008," when the US subprime market breakdown and the collapse of Lehman Brothers triggered the worst financial crisis since the Wall Street crash of 1929.
Greece is not the only worry. Spain, the fourth-largest economy in the 17-country eurozone, on Saturday secured a European lifeline of up to 100 billion euros ($125 billion) to save its stricken banks
It thus became the fourth eurozone member to require a bailout, following Greece (twice), Ireland and Portugal.
Nervousness about the crisis is evident beyond Europe, with Japan calling on the EU to act "responsibly" and US Federal Reserve chairman Ben Bernanke saying the situation posed "significant risks" to the world's top economy and its banks.
With investors and credit rating agencies spooked by Greece having the highest debt-to-output ration in the eurozone -- an estimated 161.7 percent in 2011 -- Athens is effectively unable to raise money by issuing bonds.
This has forced the country to seek international help twice, first for 110 billion euros ($137.1 billion) in May 2010 and then for 130 billion euros earlier this year plus a 107-billion-euro private debt write-off.
The price though has been Greek promises of painful belt-tightening involving deep cuts in salaries and pensions that have added to the country's economic woes, with a recession now in its fifth year and one in five unemployed.
As became clear from the previous legislative elections on May 6, ordinary Greeks are thoroughly fed up, with some 70 percent of voters supporting parties that are opposed to more austerity.
After those elections no party leader was able to put together a workable coalition, prompting the need for Sunday's re-run.
At stake this time "is whether the country will stay in the eurozone," Vassiliki Georgiadou, a political scientist at Athens' Panteio University, told AFP.
The man keeping European politicians awake most at night is Alexis Tsipras, whose leftist Syriza party came a shock second last month and who wants to tear up the bailout deals, branding them an "automatic pilot to utter disaster."
"There is one real choice in these elections: the bailout or your dignity," the 37-year-old said.
But getting more slack from the troika --- the International Monetary Fund, the European Union and the European Central Bank -- and staying in the euro could well turn out to be incompatible.
European leaders, not least Chancellor Angela Merkel of powerhouse Germany, have repeatedly rammed home that enough is enough.
"No one is threatening anyone here," German Finance Minister Wolfgang Schaeuble said. "But we have to be honest ... and tell our Greek friends and partners that there is no other way than the one we have chosen together."
If the next Greek government -- the forming of which in itself could be a tall order if the results are similar to May 6 -- reneges on its commitments, the flow of funds will cease.
The consequences could make austerity cuts look like a walk in the park, experts say, since without aid the government will very soon run out of cash to pay salaries and pensions and to keep public services running.
"Overall, the economic consequences of a Greek euro exit would be disastrous, or, to use a Greek word, catastrophic," said Lucas Papademos, until last month Greece's technocrat prime minister.
The central bank will have to introduce another currency, most likely the drachma, to keep the economy functioning, but which could very quickly plummet, potentially causing economic chaos and social unrest.
Thirty-eight years after the end of Greece's military junta, this would be a gift to extremist parties, including the neo-Nazi Golden Dawn, whose leader denies the Holocaust and which has been linked to attacks on immigrants.
Before any euro exit, a bank run could ensue as Greeks empty their accounts of euros before a forced conversion into drachmas, dealing a sucker punch to lenders, and not just in Greece.
The fear is that if Greece leaves the eurozone, a Rubicon will be crossed and that other exits will follow, as "contagion" spreads to other countries and the 13-year-old currency union unravels.
"We recognize the sacrifices that the Greek people have made," US President Barack Obama said Friday. "But the Greek people also need to recognize that their hardships will likely be worse if they choose to exit from the eurozone."