As of Tuesday GREXIT, an exit of Greece from the Euro-zone is back on the table. So is a large scale debt write-off for the country.
By Benjamin Zeeb
*This article, along with the in-text images, blockquote, charts and graphs, was originally published by Project for Democratic Union
On Tuesday, prime minister Antonis Samaras asked the Greek parliament to move forward the presidential elections in the country to 17 December. The vote will be held in parliament, where Samaras’ ruling coaltiton holds a majority of just 5 votes.
Should parliament fail to elect a new president, snap elections will be held, with Syriza, Greece’s anti-austerity party, currently leading the polls. Despite the momentous consequences this decision could have for the Euro-zone, the media in many countries have been almost eerily silent on the subject. In Spain and Germany neither Süddeutsche Zeitung, nor Der Spiegel, nor El País feature the news prominently on their websites.
The move by Mr. Samaras has brought down the Greek stock index 13% on Tuesday, its largest drop since the beginning of the Euro-zone crisis with investors in fear of a comeback of the turmoil that haunted the continent from the summer of 2011 until Mr. Draghi put an end to the drama with his vow to “to do all that it takes” in 2012.
What is at stake?
The consequences should Syriza come to power in Greece could indeed be dramatic:
“Greece in the next six weeks may prove to be more important for global markets than Russia/Ukraine was in 2014,” Charles Robertson, chief economist at Renassiance Capital told the Financial Times. He added that “a possible Syriza election victory may force the Euro-zone to choose between a fiscal union or the first euro exit.”
Robertson is not the only one warning of the potential risks of a failed parliamentary vote. under the title, “The Greek endgame begins”, Paul Mason, a journalist for Channel 4, wrote in his blog:
“Syriza has been in the City of London and other financial centres outlining its plans: it will demand a 50 per cent write off of the outstanding debt and that the ECB buy all Greek debt for the next 60 years at zero interest rates. An executive from Capital Group, a major investment firm, produced this leaked summary of one investor briefing with Syriza in which he described their plan as “worse than communism.”
While this outcome is of course contingent upon the parliamentary vote failing and even then Syriza might not win decisively enough in the following elections to substantially alter Greece’s course on the Euro, sooner or later Euro-zone leaders will have to expect some version of this scenario becoming reality. Keep in mind that Greece is not the only country in the Eurozone where a pro-default party is polling highly:
The Spanish elections next year in particular should be cause for concern to anybody with vested interests in upholding the status quo. While less radical than Syriza in many regards, Spain’s Podemos party holds almost identical views regarding the current governance of the Eurozone and is leading the polls in front of the social democrat PSOE and conservative PP.
Once a pro-default party is voted into power in any of these three countries, there are three basic options available:
1. Let them leave
The most unlikely scenario given the unforeseeable consequences. Still representatives of the Commission and core Euro-zone states are likely to hold this up in any coming negotiations as the big stick, pretending that it isn’t the banking sectors of their home countries that would be hit hardest by this scenario.
2. Bail them out
This might come in the form of an outright debt-write down. But the most likely scenario is a semi-disguised bailout via a huge bond-buying program of the ECB. Economist Wolfgang Münchau puts the total cost of such a move at about 3 trillion Euros – vastly more expensive than issuing Euro-bonds. But the fear of giving up national sovereignty reigns supreme on both sides of the negotiation table, so we might well see a dramatic end to Mrs. Merkel’s course of responsible monetary policy. This of course would relieve all pressure on peripheral Eurozone countries to engage in any meaningful reform and cement a powerful and in-transparent ruling structure where key decision makers do not rely on any democratic mandate.
3. Euro-bonds and democratic accountability
All existing state debt is federalised in a once-off move through the issue of Union Bonds to be backed by the entire tax revenue of the common currency zone. This is accompanied by the introduction of an automatic balanced budget requirement for all national and regional administrations with a subsequent ‘no bail out clause’ and an insolvency purge of all insolvent private sector financial institutions, in which deposits, but not loans, shares or bonds, are to be refunded by the Union. In order to legitimize such a move this new Union would have to be run by a directly elected representative of all Euro-zone countries.
Obviously the third option is what PDU is trying to make happen. Until we succeed there will always be a next election during which an entire continent holds its breath.
*This article is published in Partnership with
Cover Image: ‘Greek Parliament Building‘ by Tilemahos Efthimiadis