EU Dodges Bullet in Greece, Budget Problems Remain

On Sunday Europe dodged a bullet the size of an asteroid. Instead of electing a government bent on taking Greece out of the euro zone, voters chose to re-appoint a more Europe-friendly coalition. The two long-term dominant parties, New Democracy and Pasok, now enjoy a very slim majority. However, the bleak sunshine that peeked through in Athens today was partly clouded by the parliamentary vote in France, which gave the new socialist president Hollande’s party a solid majority. This will most certainly put more stress on the French economy and thereby on the EU and the euro zone, though the impact will be mitigated by the status-quo outcome of the Greek election.

First, let’s take a closer look at what happened in Greece. The absurd side of the outcome is that the New Democracy-Pasok coalition is responsible for the policies that put Greece in its current mess. This coalition now represents the least unpalatable alternative: it has no ideas on how to actually improve the Greek economy – all it has going for it is that it is the only combination of parties in the Greek parliament that would not make a bad situation go worse. As Reuters reports, this seems to have been enough of a reason for Greeks to vote for them:

Parties committed to Greece’s bailout were on course to secure a parliamentary majority on Sunday and the radical leftists who had vied for first place conceded defeat in an election that could keep the debt-laden country in the euro zone. An official projection released by the interior ministry showed conservative New Democracy taking 29.5 percent, with the radical leftist SYRIZA bloc just behind on 27.1. The PASOK Socialists were set to take 12.3 percent of the vote. Because of a 50-seat bonus given to the party which comes first, that result would give New Democracy and PASOK 161 seats in the 300-seat parliament, in an alliance committed to a 130 billion euro ($164 billion) EU/IMF bailout keeping the country from bankruptcy.

Again, this is good news only in the non-negative sense that nothing even worse happened. Greece will still be under the same destructive austerity pressure that has been on the country for more than two years now. There will be even more cuts to spending, more attempts at raising taxes and, as a result, an even more depressed economy.

The Reuters story continues:

“I am relieved,” smiling New Democracy leader Antonis Samaras told Reuters, leaving his office to joyous chants from supporters. “I am relieved for Greece and Europe. As soon as possible we will form a government.” Samaras said in a speech that the country would honor its commitments to its euro zone partners. “The Greek people voted today to stay on the European course and remain in the euro zone… there will be no more adventures, Greece’s place in Europe will not be put in doubt,” he said.

It remains to be seen, though, how long this election result will prevail. While legally valid until the next election, it is entirely possible that its political viability will be much shorter than that:

The result, however, exposed a deeply divided society, and could leave an emboldened SYRIZA leading new protests against a coalition governing with significantly less than 50 percent of the electorate’s support. PASOK leader Evangelos Venizelos called for a government that would include SYRIZA, but the radicals ruled out joining a coalition that would stick to the punishing bailout terms that have helped condemn Greece to five years of record recession. Tsipras had vowed to tear up the terms, betting that European leaders cannot afford the financial market turmoil that could be unleashed by cutting a member of the euro zone loose.

That is a well argued but probably incorrect argument. Germany was ready to kick Greece out of the euro zone, estimating that such a move would be less pricey than keeping the Greeks in at all cost. Thereby, Germany would have forced the EU to maintain its hard stance against other countries with acute debt problems.

That said, the parliamentary elections in France cemented the country’s left turn, a factor that would have made it harder for Germany to gather support for expelling Greece from the euro:

French President Francois Hollande’s Socialist Party won an outright parliamentary majority in an election on Sunday, according to an initial vote count by polling institutes. The CSA polling institute said the Socialist-led bloc won 320 seats, well above the 289 required for a majority in the 577-seat lower house and giving Hollande a strong hand to pass legislation to steer France through the euro zone’s debt crisis. The Ipsos polling institute said the Socialists won 296 seats.

While French socialists are not as kooky as their ideological brothers in, e.g., Greece, they are still teetering on the edge of political sanity. President Hollande has vowed to raise taxes on small business owners and others who the left castigate as “wealthy”. They have also promised more “social reforms”, meaning restored or expanded entitlement spending.

While the election result in Greece serves to keep the country in the euro zone, the combination of that election and the radicalization of the French parliament creates a new dynamic in Europe. France is now staunchly opposed to the kind of austerity measures that have been forced down the throats of, primarily, Greece and Spain. The coalition that emerged from the Greek election will have an anti-austerity opposition breathing down its neck and will be happy for any EU concessions when it comes to future austerity programs.

At the same time, the budget problems remain in both Greece and Spain – and in other countries such as Italy, Portugal, Belgium and the Netherlands. Since all these countries want to preserve their welfare states, they still have enormous budget problems ahead of them. The welfare state is the root cause of their trouble (see, e.g., here and here) which means that whatever they do next, they will treat the symptom – the budget problems – and not the disease. Interestingly, this is precisely what the current austerity policies do, too. The difference is that austerity puts emphasis on self-defeating spending cuts while the alternative, promoted unanimously by Europe’s leftist parties, puts emphasis on self-defeating tax hikes.

As a result of the Sunday elections, it is likely that there will be  stronger voices across Europe favoring higher taxes. The end result will be about as bad as what the current austerity policies have accomplished.

Until Europe commits to ending its welfare state, there won’t be any change for the better over there.