Up Front

A Greek Crisis, but not a Euro Crisis

Douglas J. Elliott

After the Greek Parliament today failed to elect a new president, Greece will be going to the polls in a snap election on January 25th. Given Greece’s role in the Continent’s sovereign debt crisis of the last several years, the question is whether this political uncertainty could lead to another full-blown round of Euro Crisis. It shouldn’t.

The odds are that the new government in 2015 will be led by the far-left Syriza party which insists it will make major changes to agreements with its European Union (EU) partners. A deadlock in negotiations is quite possible and could lead down a path towards unilateral Greek default on some government debt or, in the extreme, an exit from the Euro. Fortunately, the most extreme cases are low probability and Europe is likely now positioned to contain any problems within Greece itself, without spurring another serious crisis in the wider Eurozone.

The election is being called after the government of Prime Minister Samaras failed to achieve the necessary super-majority to elect a new President. (The Greek constitution requires a general election if Parliament fails to elect a president, even though the position is now largely ceremonial.) Syriza, the likely winner, wants to relax requirements for future austerity in Greece, reverse some important steps already taken, and write off of a portion of the debt owed by Greece to other European governments.

Genuine differences of opinion on the right path for Greece and the Eurozone combine with serious political obstacles to guarantee very tough negotiations. Syriza is perhaps the most left-wing major party in any EU nation at the moment and therefore there is a strong ideological divide with its EU partners. Further, to many in Germany and other strong Eurozone nations, Greece is a symbol of irresponsible behavior and politicians in those nations are loath to reward bad behavior. Worse yet, core demands of Syriza would require national governments in the rest of Europe to write off portions of the money loaned to Greece, costing their taxpayers money.

A couple of years ago the prospect of a Syriza-led government caused serious tremors in European markets because of the fear that an extremely bad outcome in Greece was possible, such as its exit from the Euro system, and that this would create contagion effects in Portugal and other weaker nations. Fortunately, Europe is in a much better situation now to withstand problems in Greece and to avoid serious ramifications for other struggling member states. The worst of the crisis is over in the weak nations and the system as a whole is better geared to support those countries if another wave of market fears arise.

It is quite unlikely that Greece will end up falling out of the Euro system and no other outcome would have much of a contagion effect within Europe. Even if Greece did exit the Euro, there is now a strong possibility that the damage could be confined largely to Greece, since no other nation now appears likely to exit, even in a crisis.

Neither Syriza nor the Greek public (according to every poll) wants to pull out of the Euro system and they have massive economic incentives to avoid such an outcome, since the transition would almost certainly plunge Greece back into severe recession, if not outright depression. So, a withdrawal would have to be the result of a series of major miscalculations by Syriza and its European partners. This is not out of the question, but the probability is very low, since there would be multiple decision points at which the two sides could walk back from an impending exit.

It also must be noted that a Syriza victory in the elections is probable, but definitely not certain. The probability is north of 50 percent, but likely less than 75 percent, of a Syriza government strong enough to follow through on its perceived mandate. It could even take more than one round of elections to achieve a government with a working majority, as was true with the dual elections last time around.