Europe has avoided—for now—the drama of a Greek exit from the euro thanks to Greece electing a party that broadly backs its bailout terms. Europe has bought time in the face of crisis, but the same deep-rooted problems remain.
Europe buys more time
The Greek vote for New Democracy, the party most supportive of the bailout conditions, is an enormous relief for the region and the global economy. The alternative may have been Greece crashing out of the eurozone.
Although a Greek exit is still possible, the recent election somewhat lowers the risk in the short term. Athens has established a coalition, but Greece does not have a strong history of coalition politics. Furthermore, social unrest is already widespread and violent. An escalation in response to more austerity could be politically very destabilizing. Greece still has to negotiate its austerity plan with the European Union, the European Central Bank and the International Monetary Fund, and is due to reimburse 3.2 billion euros of its loans this month. If discussions are prolonged, the tightening squeeze on public finances will intensify.
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Furthermore, the somewhat overshadowed outcome of French parliamentary elections—a resounding victory for Francois Hollande’s Socialists—should pave the way for calmer political waters as the pre-election political posturing subsides. Hollande’s anti-austerity positioning, at odds with Angela Merkel’s agenda, may still be damaging to progress in Europe, but a strong majority behind him in France should allow him room to maneuver internationally.
Hollande’s growth agenda has made some progress. The promotion of spending in infrastructure-related projects for the equivalent of a mere 1% of GDP is not a bad development, but lacks two things: size and speed of impact. Merkel wants to support growth in her own way, but she wants to do it through reforms that promote structural and sustainable growth. She also wants further political, fiscal and banking integration to force accountability and some level of control—a logical goal given the circumstances.
Break-up is too costly