The Economic Implications Of The Next Greek Election

Economists and bankers throughout the world are waiting with baited breath for the result of the next Greek general election, which is scheduled to be held in June 2012, following the failure of the parties to form a government following the election in May.

The failure of the parties to form a workable government was due, principally, to the refusal of the Syriza party to participate in any coalition that retained a commitment to proceed with the austerity measures insisted upon by the European Union and The International Monetary Fund. Without such a commitment, the promised bailout of the Greek economy is likely to be withdrawn, raising the inevitable spectre of Greece defaulting on its debts and being asked to leave the Eurozone. As current polls are suggesting a strengthening of the power of the Syriza party, this scenario seems more and more likely to become reality in only a few weeks time.

If the next Greek government simply refuses to adhere to the terms of the bailout, there are primarily two potential consequences.

Firstly, there is, as mentioned above, the possibility of Greece having to leave the Eurozone. The effect on Greek banking is likely to be catastrophic, causing a knock-on effect in all those states that have exposure to Greek debt and possibly leading to contagion in Portugal and, more worryingly, Spain. Greek citizens have already started withdrawing large sums from the banks, in response to their fears about the safety of their cash and the fear is that this situation will be exacerbated by any temporary closure of the banks to re-introduce the drachma as the nation's currency unit.

Secondly, the other members of the EU and the IMF could devise a different, less onerous austerity package, in the hope that this will find favour with the new Greek legislature, thereby facilitating their continuing participation in the single currency. This, however, would be likely to engender suspicion and hostility towards the financial governance of the Eurozone economy in general and, more specifically, a lack of confidence in its ability to apply and adhere to appropriate measures against any further defaulting member economies.

Either of these propositions would be hugely detrimental to the single currency but many economists are of the view that the financial markets would be able to cope with Greece departing the Eurozone for the very reason that it has been on the cards for a considerable period of time. Many think it could be the best outcome for the remaining members, not least because of the clear message that it would send out to other potential defaulters. The implications for Greece, however, with the likelihood of a seriously devalued new currency cannot be anything but stark.

One way or the other, whether it be via a restoration of the acquiescence with the austerity measures required of them or a departure from the single currency, it is likely to be a long, hot summer for the Greek people.

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