Wednesday, June 20, 2012
Europe and the financial markets watched intently June 17
as Greece held general elections. German Chancellor Angela Merkel, French
President Francois Hollande and Italian Prime Minister Mario Monti all delayed
their flights to the June 18 G-20 summit in Mexico to await the results.
The two leading contenders in the elections were the
center-right New Democracy Party (ND), which pledged to uphold Greece's
commitments to austerity and honor the country's financial agreements with the
European Union and the International Monetary Fund, and the Coalition of the
Radical Left (SYRIZA), a group of far-left politicians who pledged to reject
Greece's existing agreements, end austerity and maintain the country's position
in the eurozone. A third major party, the center-left Panhellenic Socialist
Movement (PASOK), shares the ND's position of maintaining Greece's bailout
agreement. PASOK had been Greece's ruling party until it formed a unity government
with the ND late in 2011.
For a while it seemed these elections would be
definitive. Either Greece would reject the country's agreement with its
international lenders, potentially being forced out of the eurozone, or it
wouldn't. If Greece rejected austerity and forcibly or voluntarily left the
eurozone, the country might set a precedent for other troubled states and
precipitate a financial crisis -- a eurozone exit and default would likely go
hand in hand. Europe would be tested as never before, and it would find out how
resilient it is to a wider financial crisis.
But in Europe, the least likely outcome is a definitive
one. ND won the election with about 29.5 percent of the vote, earning 78 seats
in parliament plus another 50 seats awarded to the winning party by the Greek
Constitution. SYRIZA received roughly 27.1 percent of the vote, equivalent to
72 seats, and PASOK received roughly 12.2 percent of the vote, or about 33
seats. The rest of the vote was scattered among a host of other parties. A
party needs 151 seats to gain an absolute majority in parliament, but since no
single party passed that threshold, a governing coalition must be formed. So
the ND needs PASOK if it is going to cobble together a governing coalition, but
PASOK has said it will not join a coalition without SYRIZA. It is unclear what
a coalition would look like between a party that wants to respect the bailout
agreement and a party that wants to reject it, but such a coalition is unlikely
to happen anyway. SYRIZA wants to form a powerful opposition. Something
resembling a government eventually will be assembled regardless of current
rhetoric.
The Greek vote has settled nothing. In fact, it may not
even lead to the formation of a government; the last election failed to produce
a government and forced this election. That the European crisis most severely
affected a country so politically fractious could be seen as pitiable. On the
other hand, one could argue that the crisis inevitably would be most severe in
the most divided country -- not because the divisions caused the crisis, but
because the crisis caused the divisions.
The pressure brought on by the circumstances in Greece
undermined whatever political order was in place; the choices for policymakers
were so limited and so frightening that coherent responses were difficult.
Greece has options, but it is unable to choose one. More than anything, Europe
wants a decision on its future, whatever that decision might be. On June 17,
Greece disappointed Europe not because of the choice it made but because it was
crippled with indecision.
Crisis Management
Greece's indecisions are at the ground level of Europe.
Another and more significant framework for indecision is emerging in
Franco-German relations. The French Socialist Party won an absolute majority
the same day that the Greeks entered another gridlock. This makes it possible
for France's Socialists to form a government without the Greens, giving
Hollande a strong and coherent platform from which to operate.
France's position on managing the sovereign debt crisis
differs fundamentally from Germany's. Germany has said it will not agree to
proposed solutions that would essentially turn the eurozone into a transfer
union until the rest of Europe can balance their budgets through austerity
measures. Germany believes this must be the first step to further EU and
eurozone integration. Hollande takes a different position. He, too, wants
greater European and eurozone integration. However, Hollande advocates economic
stimulus alongside austerity measures as a means to rebalance the finances of
European governments.
Hollande wants to grow Europe out of its financial
problems. This means stimulating economies, a process that requires deficit
spending. Hollande upholds a traditional Keynesian tenet that increasing demand
for goods among consumers will increase economic activity and increase
investment. As a Socialist with a strong leftist contingent in his party,
Hollande cannot support the German position, which constrains the economy,
particularly by decreasing government expenditures, thereby depressing
consumption.
The difference between the French and German approaches is substantial. It reveals a dispute at the heart of the European strategy for managing the crisis. The Germans have been aggressive in demanding balanced budgets. The French are becoming equally aggressive in demanding expansionary policies. Both want to avoid defaults, but the Germans want to guarantee payments of debt by a combination of bailout and austerity. The French want to add stimulus to this, which changes the situation entirely because the stimulus would be funded in large part by German coffers.
This is not a simple matter of divergent economic theory.
It is a matter of national interest. France is not as economically decrepit as
Spain or Italy, let alone Greece, but nonetheless it is feeling the pressures
of the financial crisis. If Europe continues on its path toward recession,
France will face higher unemployment and therefore domestic political pressure
under the German plan. It is not in Hollande's or France's interests to follow
the German course. For its part, Germany cannot risk further government
deficits in the European economic system. Germany's robust economy gives the
country a financial cushion to soften the effects of deficit cuts; the rest of
Europe, including France, does not have this luxury.
Interestingly, France and Germany were as one on this
issue until Hollande was elected president. Indeed, the foundation and mission
of European integration has been the close alignment of Germany and France. A
founding principle of the union, such an alignment guaranteed stability and
discouraged conflicts that had torn Europe apart. Now, Europe has lost its
coherence at the highest level, albeit in a more orderly manner than in Greece.
Disharmony and Public Opinion
Of course, the situation is not that simple. What Germany
says it wants differs from what it allows to happen. Germany claims to favor
disciplined austerity, but more than any other country Germany needs the
eurozone to stay intact. It is thus willing to compromise on austerity and on
underwriting bad debts. On the other hand, Germany rejects the idea that a
systematic strategy to stimulate growth is needed or likely to work. France
sees no other solution, lest it face austerity itself. Both want different
fiscal policies from the members and also, logically, from the European Central
Bank.
From the most beleaguered members of the European Union
to the relations between its strongest and most stable members, there is now
profound disharmony. What drives this disharmony is public opinion. The Greek
public is divided politically; therefore, Greece is paralyzed. France held an
election in which Hollande, who holds serious doubts about German policy,
forced out and replaced former French President Nicolas Sarkozy, who shared the
German position on managing the crisis.
It is not the policymakers that are divided. Rather, the
electorate is driving apart policymakers. The German solution to the problem is
so unpalatable to the rest of Europe that traditional elite politicians
supporting Germany's plan, such as Sarkozy and former Greek Prime Minister
George Papandreou, are being replaced. Their replacements tend to reject the
German position.
Indeed, political reality has constrained the actions of
European lawmakers. Until about five years ago, a broad consensus governed
Europe when it came to EU matters, and politicians were free to align
themselves with Europe. This is no longer the case -- the solution for
maintaining Europe has diverged. Most important, Germany has become the problem
in the eurozone where once it was the solution.
Structural issues, such as German dependence on exports
to the European Union, only partly explain the change in Germany's public
perception. More accurately, German methods for managing the crisis
increasingly are seen by other countries as significant threats to their well
being -- there is not one anti-German coalition. Germany wants to find
accommodation with France. The problem rests in how the French and German views
are reconciled. France is not yet leading a coalition against Germany, but it
is difficult to imagine a different scenario.
The more elections are held, the more the public will
force their leaders in various directions. More often than not, this direction
will eschew austerity and Germany. Over time this will solidify into a new map.
While this has yet to happen, the recent elections at the least are not solving
Europe's problem. In fact, they may be further dividing the Continent. And
there are many elections to go.
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