Election 2012: Short Respite for Greece As Pro-Bailout Parties Secure Victory

Short-Term Respite

The pro-bailout conservative New Democracy (ND) party came first in the repeat Greek parliamentary election held yesterday (17 June), easing fears of an imminent Greek exit from the Eurozone. This was the second election held in Greece within six weeks, as the 6 May poll failed to provide a conclusive winner able to form the majority government (see Eurozone - Greece: 15 June 2012: Election 2012: Future in Eurozone at Stake As Greece Votes Again). Similar to the May election, yesterday's poll resulted in a victory for the ND party, led by Antonis Samaras, which generally supports the bailout plan agreed with Greece's international lenders earlier this year. Unlike in May, however, ND should be in a better position to form a government and avoid an inconclusive outcome. However, ND's advantage is not large enough to form a majority government. Indeed, it will have to rely on other parties, particularly with the former heavy-weight Panhellenic Socialist Movement (PASOK) led by Evangelos Venizelos, to form a coalition government. PASOK also stands behind the bailout deal, although it supports its revision in order to implement fiscal adjustment over three years, instead of two.

Another major development was the strong increase in support for the anti-bailout, left-wing Coalition of the Radical Left (SYRIZA) of Alexis Tsipras, which finished second. Support for SYRIZA increased from 17% of the votes in May to almost 27% of the public vote. This would translate into 71 seats in parliament. Anti-bailout Independent Greeks (ANEL) won 7.5% (20 seats), followed by ultra-right Golden Dawn with 6.9% (18 seats), Democratic Left (DIMAR) with 6.3% (17 seats), and the ultra-left Communist Party of Greece (KKE) with 4.5% and 12 seats in a 300-member parliament.

Yesterday's results should provide markets with some relief. However, this is likely to be short-lived. Firstly, it not yet clear whether PASOK will join the ND in a formal coalition or whether it will remain in opposition and support ND during parliamentary votes. PASOK calls for a wider “unity” coalition, which would also include DIMAR and SYRIZA in order for the government to have as wide a mandate as possible. The creation of such a coalition is, however, unlikely. SYRIZA's Tsipras has already announced that his party would assume the post of the opposition leader. For its part, DIMAR would be willing to join a “unity” coalition, but probably not without SYRIZA. Meanwhile, the party supports gradual disengagement with the bailout, which means that its goals differ from those of ND and PASOK. Moreover, PASOK is also demanding that this wide coalition be led by a technocrat, and not by Samaras, making ND's job of forming a government even more difficult.

Weak Government

Even if PASOK and ND form the coalition (controlling a majority 162 seats), such a union is likely to be short-lived. The two parties are historic foes, standing on the opposite sides of the political spectrum. Their co-operation in the unity government in place since November was not without problems. This means that its continuous cooperation is unlikely to last four full years; more likely, Greeks may be bracing for another early election within next two years. The next government is also facing tough measures and strict external oversight to implement agreed measures, including more painful austerity and reforms. This route could result in defections within parties as the bailout and accompanying measures already left ND and PASOK internally divided. The PASOK-ND coalition would have a 12-seat supremacy, but possible defections would make it more vulnerable to premature collapse. Meanwhile, strikes and protests could return to the streets again, fuelled by strong anti-bailout rhetoric from SYRIZA. This would put extra pressure on the government, while making it extremely difficult for the lawmakers to meet fiscal goals set by the troika.

Outlook and Implications

The new Greek government will not be able to take any “honeymoon period” following its instalment. Greece will be under increased pressure to implement measures agreed in the latest bailout, despite the fact that the government will probably try to renegotiate some of the terms. The concerns remain about the government's longevity and strength to enact structural changes needed to turn around Greece's lingering and uncompetitive economy. The ND/PASOK's past records indicate that this will not be easy. With outspoken, critical and strong opposition, the government will also lack the support of a wider political spectrum, as well as wide public mandate. Angry unions, supported by the left, will give the government a very hard time.

Amid this background, Eurozone policymakers will surely be breathing signs of relief that a catastrophic scenario seems to be avoided, at least in the short term. IHS Global Insight believes that the Eurozone will be ready to renegotiate some points of the memorandum of understanding if the new Greek government shows a strong political willingness to implement the bailout conditions. However, these changes are expected to be at the margin and a sudden change of the policy mix included in the programme is unlikely.

A dire economic situation will also make it more difficult for Greece to fulfil its part of the deal agreed with its official creditors in return for financial support. Even under an optimistic scenario, the economy is likely to struggle for at least another two years. As long as the economy continues to be in free fall, support for austerity and reforms is likely to decrease even more, eroding the democratic legitimacy for the economic programme and possibly fuelling social tensions.

All these factors suggest that, although the worst seems to be avoided in the very short run, uncertainty over Greece's future in the Eurozone is unlikely to disappear following yesterday's results. On the other hand, plummeting activity levels, weak social and political support for reforms, and Greece's poor track record on meeting the targets agreed with its official lenders suggest that concerns about the Mediterranean country will continue to persist over the coming months.