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Europe’s Future on the Ballot

Tuesday, May 1, 2012

Depending on what happens this weekend, Europe should start bracing itself for a renewed intensification of its sovereign debt crisis.

On May 6, all eyes will be focused on the second round of the French presidential election, which Socialist challenger Francois Hollande is likely to win. Equally important for Europe’s future is the Greek parliamentary election scheduled for the very same day. The Greek election could deliver a government with the slenderest of parliamentary majorities, making it difficult for Greece to honor its official debt obligations and to remain within the Eurozone.

A Francois Hollande election victory would constitute a serious setback for efforts to defuse the European sovereign debt crisis. A Hollande presidency would raise doubts about a united French-German front to address the crisis  because  Hollande is likely to press for more growth-oriented policies in Europe and for a less restrictive European Central Bank than Germany would be prepared to countenance. It would also raise doubts about the future direction of the French economy, in response to Hollande’s proposals to impose a 75 percent tax on the highest income brackets, to raise the minimum wage, and to reduce the retirement age.

A Hollande presidency would raise doubts about a united French-German front to address the crisis.

The importance of the Greek election resides in its determination of whether Greece will have a sufficiently strong government to implement the stringent conditions of the recently agreed second IMF-EU bailout package. On the eve of the Greek election, the most recent electoral polls are far from encouraging. They show that the combined votes of the New Democratic Party and PASOK, the current ruling coalition government, would amount to only about 36 percent of the votes. Such an outcome would be less than half the combined votes that those two parties polled in elections only two years ago. It would also not be much more than the combined votes likely to be polled by Greece’s hard Left political parties.

Under the Greek electoral system, 16 percent of parliamentary seats are allocated to the party that gets the most votes. This would give the New Democratic Party and PASOK the slightest of majorities in a parliament which would include numerous parties of the extreme left and the extreme right. If over the past year the coalition had difficulty ruling Greece with a large parliamentary majority and without much representation of radical parties, one has to wonder how governable Greece will be with a highly fractured parliament and with a coalition government enjoying only a slim parliamentary majority.

Over the past three years, the Greek economy has contracted by a staggering 16 percent while unemployment has soared from around 7 percent to beyond 21 percent. A weak Greek government is the last thing that Greece now needs if it is to restore investor and consumer confidence as a necessary precondition for an end to Greece’s downward deflationary spiral. And without a stabilization of the Greek economy, there is no prospect that Greece can restore order to its tattered public finances.

One has to wonder how governable Greece will be with a highly fractured parliament and with a coalition government enjoying only a slim parliamentary majority.

At present, Greece’s only sources of external finance are the IMF, the European Union, and the European Central Bank. It is unclear whether a new Greek government will have the mandate both to cut public spending by 5.5 percent of GDP over the next two years and to implement the painful structural reforms that the IMF-EU is requiring as a precondition for the continued disbursement of funds under their program. And without IMF and EU funding, Greece would have little option but to default on its official loans and to start contemplating whether life outside of the euro might be more in Greece’s long-term interest than remaining within that straitjacket.

The stakes for the future of the euro zone are extremely high in the French and Greek elections on May 6. One has to hope that the electoral polls suggesting a Hollande victory in France and a collapse of the political center in Greece prove to be wrong. If those polls prove to be right, Europe should start bracing itself for a renewed intensification of the European sovereign debt crisis that has been plaguing it for over two years and that has already forced much of the continent into a double-dip recession.

Desmond Lachman is a resident fellow at the American Enterprise Institute.

FURTHER READING: Lachman also writes “The Next and More Serious Phase of the European Crisis,” “Time for Greece to Leave the Euro,” “Binds and Bonds: Why the EU Should Break Up,” and “Europe Can't Kick the Can Much Farther.” John H. Makin advises “Contain the Crisis.” Alex J. Pollock contributes “Sovereign Debt and Default - A History.”

Image by Rob Green / Bergman Group

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