Elections Leave Greeks Lacking Coalition, Others Rethinking Austerity

Citigroup analyst says Greece has a 75% chance of leaving the euro zone by the end of 2013

The European Central Bank headquarters in Frankfurt. (Photo: AP) The European Central Bank headquarters in Frankfurt. (Photo: AP)

Successful votes against austerity from Greece to France have pushed officials to consider other ways to cope with the debt crisis in the euro zone, with the International Monetary Fund (IMF) signaling an increase in flexibility even as investors get jumpy over the outcome.

One area of concern, according to a Reuters report Tuesday, was Greece’s failure to create a governing coalition out of the disparate parties who won seats in the weekend election.

While Antonis Samaras, leader of the conservative New Democracy party, had three days to put together an alliance among the other parties, he bowed to defeat within only hours and handed back the job to the government. Although New Democracy had won the largest number of seats, angry voters had boosted representation by both the far left and the far right, and those parties were in no mood for compromise.

“I tried to form a coalition government with two goals: that the country remain in the euro and bailout policies change to include growth measures,” Samaras said in a statement. “I did what I could to get a result but it was not possible. As such, I have informed the president of the republic and handed back the mandate.”

Now the task of forming a coalition falls to Alexis Tsipras, leader of the Syriza party, which gained the second-largest number of seats. Tsipras, who was to meet with President Karolos Papoulias on Tuesday, according to Bloomberg, has said he will drive a bid to renegotiate the terms of Greece’s aid package.

Not only did the two main governing parties experience voter displeasure, but one of the groups that won representation has advocated sowing land mines on the Greek-Turkish border and another wants to force Germany to pay World War II reparations. Two other parties refused outright to meet with Samaras to discuss compromise. Tsipras will have three days to see if he can do better; if not, the task will pass to the Pasok party. Failure there will pass the task back to Greece’s president.

According to Citigroup, the Greek election results have boosted the risk of Greece leaving the euro by the end of 2013 to as high as 75%.

Markets reacted unhappily to the election results, both in Greece and in France, where the Socialist candidate, Francois Hollande, ousted President Nicolas Sarkozy. Hollande too rode to victory on a platform of opposition to tough austerity measures and a promise to promote growth. That position was echoed by Italy, which after the election sent out its own call for growth.

"Europe has to give concrete signs that it believes in growth," Industry Minister Corrado Passera of Italy said in the report, adding that there needed to be larger E.U. investments in infrastructure and technology. While Passera also said that Hollande’s victory should bring about “concrete facts” on a pro-growth policy for Europe, he added that he did not advocate abandonment of tough fiscal policy.

However, Stefano Fassina, who is responsible for the economic policy line of the center-left PD party, one of the two main parties supporting Prime Minister Mario Monti’s government, called for a relaxation of austerity and a delay on accepting new E.U. rules.

He may have some support. When Monti called Hollande to congratulate him on his victory, he said in a statement, "Responsible public finance policy is a necessary but certainly not sufficient condition for the key objective: a sustainable growth which can create jobs and produce social equity. For this reason, it is fundamental that Europe urgently adopts concrete policies for growth."

The move away from austerity resulted in a signal from IMF Managing Director Christine Lagarde that more flexibility might be forthcoming from that body. In a Zurich speech she said, "The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment soon."

However, even as she advocated for a means of reducing debt, she said that pitting austerity against growth was a “false debate,” and added that countries could come up with ways to achieve both. "We know that fiscal austerity holds back growth and the effects are worse in downturns. So the right pace is essential—and the right pace will be country specific. The right mix between cutting spending and raising revenue is also critical."

She added, "As next year looms on the horizon, countries need to keep a steady hand on the wheel. If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets. In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens."

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