The Greek vote is cause for relief but not rejoicing. The Greeks have bought themselves a breathing space by voting for pro-bailout parties. But the resulting coalition may be weak, and the economy is still shrinking, and markets are still sceptical about the Euro zone’s ability to find a comprehensive solution to the crisis.
Greece’s immediate challenge is to form a government. The centre-right New Democracy party, which came first, got only 129 out of 300 seats with 29.7 per cent of the vote. Fortunately, the rest of the Euro zone is piling on the pressure for a stable government to be formed fast, and that message seems to be getting through. The capacity of Greek politicians to wrangle shouldn’t be under-estimated. But the likelihood is that Antonis Samaras, New Democracy’s leader, will become prime minister, supported by the centre-left PASOK and the smaller pro-euro Democratic Left party.
Such a coalition could count on 179 MPs supported by nearly half the popular vote. But it wouldn’t be strong. Samaras isn’t a popular figure, even in his own party. He would need to bring the country back on the austerity path. And he would be harried all the way by the radical left SYRIZA party, which came a close second in the election and wants to tear up the bailout plan.
The rest of the Euro zone will want to help Samaras by giving Greece extra time to hit its budget targets and by promising more investment. A rapid disbursement of the next tranches of bailout money, especially to complete the recapitalisation of banks, is possible. But the scope for help shouldn’t be exaggerated. Germany will not show leniency on the need for structural reforms, such as cracking down on tax evasion and slimming down the civil service. And any extra time (which of course means extra money) will be needed just to make up for the fact that the economy has worsened further during the months of electioneering.
The Greek problem could easily rear its ugly head again in a few months. With Spanish 10-year bond yields back above seven per cent and Italian ones over six per cent early on June 18, the rest of the Euro zone must brace for the shocks ahead.