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Greek election: European markets stumble as pro euro party wins

The Greeks — narrowly — opted for a safer course, voting for the pro-bailout, pro-euro zone parties.

to more contagion and possibly even a breakup of the bloc.

Although it wasn't the winner, Syriza can enjoy being the vociferous opposition, sniping at any coalition that goes along with the troika’s conditions.

On Sunday night, Tsipras told his supporters the opposition would continue.

“The proposal to overturn the memorandum is the only viable solution. From Monday we will resume the struggle against it,” he said.

While PASOK called on Syriza to join a broad national unity government, the party has no intention of sullying its massive protest vote by partaking in a government that now has to impose yet more cuts and reforms.

That means that the new government is going to face a tough climate, with a revival of street protests and unrest.

In fact any new coalition faces a Herculean task. The country is fast running out of cash. It is thought that by July 20 it will have no more money to pay public sector wages, social security or pensions. In order to receive its next tranche of troika funding it needs to start implementing the austerity measures it has already signed up for in March, which gave Greece another 130 billion euros on top of the initial bailout of 110 billion it secured in 2010.

The first task will be to come up with around 11.5 billion in expenditure cuts and increased taxes demanded by its creditors.
Yet that might prove unpopular with a public fatigued by two years of grinding austerity. Many analysts are already predicting that the government could be short-lived and that Greece could return to political turmoil within months.

EU partners might try to help the new government by easing the conditions that Greece faces, for example by giving it more time to reduce its deficit.

“There can be no substantial changes to the agreements, but I can well imagine talking again about timelines,” German Foreign Minister Guido Westerwelle said on Sunday after the results came in.

And deputy finance minister Steffen Kampeter said that while Athens has to stick to its commitment it can’t be pushed too hard. “It is clear to us that Greece should not be over-strained,” he told ARD public television on Monday.

While the election result might have been a relief for Europe’s political elite, they are bound to also be cautious, well aware that they still have to deal with the same Greek political class that has, in their eyes, continuously failed to meet its previous commitments.

Furthermore, while the political decision in Greece may take the prospect of a disorderly euro zone exit off the table for now, it does not change the fundamental dynamics of the euro crisis, which has spread far beyond Greece.

Ireland and Portugal could both be forced to seek another bailout, and Spain has already requested a loan to prop up its struggling banks. Italy is also coming into the crosshairs of the markets, which have been unimpressed with the euro zone’s efforts to solve the crisis.

Even Germany is starting to feel the pinch as the economies of its vital export markets continue to contract and unemployment soars across the bloc.

There is a growing feeling that belt-tightening alone won't fix the problem. France’s new president, Francois Hollande, is emerging as a champion of the pro-growth position, in opposition to Berlin’s ongoing insistence that cutting debts and bringing about structural reforms is the only way to return the euro zone to health.

The fact that Hollande secured an absolute majority in parliament in the second round of voting on Sunday will not only boost him at home but also in Europe. That will be vital as he meets with an increasingly isolated Chancellor Angela Merkel at the the G-20 summit in Mexico on Monday.

It has emerged that last week he sent his fellow EU leaders a letter proposing a 120 billion euro growth package to be implemented by the end of the year. That proposal will also be discussed at the next EU summit at the end of June, when the leaders are expected to try and come up with some sort of strategy for turning things around.

While the markets’ reactions to the Greek elections were initially positive on Monday, with share prices up in Asian and European trading, in Europe the rally ran out of steam quickly.

European stock markets have slipped back and Spanish bond yields have gone back up above 7 percent. And while the euro hit a one-month high against the dollar it also lost value as attention turned to other weak European economies.

After all, the fundamentals of the crisis have not changed.

European banks are still sitting on mountains of bad debts, there is still no growth in sight, massive gaps in competitiveness persist and the bloc’s bailout mechanisms are too small to be able to cope with any potential bailout of both Spain and Italy.

The euro zone may have overcome another significant hurdle, but there will be plenty more ahead.