Overview of Greek Elections
Politics / Euro-Zone Jun 15, 2012 - 07:07 AM GMTBy: Simit_Patel
Greece is holding elections this weekend, and the results of these elections could determine how Greece relates to the European Union. This in turn could significantly impact the Euro, which in turn will impact everything else, which means it's potentially a big deal.
The elections are to be held on the 17th. As such this Sunday's market open could be significant and could have huge gaps. You have been warned!
Here is a brief overview on what is going on:
1. Syriza is the 'no austerity' party. Here is a list of their campaign demands. They want to stay in the Eurozone. But, the IMF and the European Central Bank have stated that if Greek does not accept austerity, measures, it will not get the bailouts it wants. Former Greece prime minister Lucas Papademos has stated there is only enough money to keep the government going until the end of June. Bank runs have started in Greece, and this may lead to capital controls.
2. Syriza's main opponent in the elections is the New Democracy party. They are interested in complying fully with the EU requirements of accepting austerity in exchange for bailouts. The argument is that this is the safe route; that austerity, while painful, is better than life without bailouts which could lead to a complete breakdown of society.
There is a bit of a bluffing game going on. The EU is threatening to take away bailouts; Syriza is threatening to leave the Eurozone, and arguing that if they do leave, it will set off a contagion effect and everyone else will leave too. Then it's the EU that's finished -- not Greece.
The one thing Syriza and the EU agree on is that no one wants Greece to leave. Syriza knows this it would take a miracle to try to work out trade agreements outside the EU and sell people on holding the drachma. At the same time, the EU knows Syriza's bluff has some strength; other countries, namely Spain, are in a similar situation and have seen what austerity does.
Personally I think the compromise that will be reached is greater fiscal unity. Greece gets to stay in the Eurozone, gets some form of a bailout, but gives up independent fiscal policy. The central banks do what they do best and print as much money as needed to make this go over as smoothly as possible. The EU has already stated this much; Bank of Japan is on board with supporting as needed as well.
The details of what fiscal unity will look like and how the transition go down remain to be seen, though transferring national debt to the supranational level, and creating Eurobonds to pay bills, is an idea that has already been proposed. The proposal, called the European Redemption Pact, would place Germany in charge of Eurobonds, and would require member countries to pass off their excess debt -- currently being defined as any debt that is 60% above current GDP -- to a fund managed by Germany and paid off via the issuance of Eurobonds. Under the proposal, countries would need to pay 20% of their excess debt to the fund managed by Germany, so that there is some form of collateral for Eurobonds. Interestingly, gold has been listed as an accepted form of payment. This is another sign of gold returning to the monetary system. The more gold is seen as a way of solving the debt crisis, the more incentive monetary authorities will have to push the price of gold higher.
By Simit Patel
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