While an election in a country on the far edge of the European Union probably shouldn’t have a major impact on the global economy, many people are warily watching the outcome of the Jan. 25 Greek elections. It’s helping to batter the euro, create heightened worries about the European economy as a whole and spilling over to U.S. markets.
A New York Times editorial set out some of the key issues. Here’s a link to the story. But here’s a quick primer on some of the key issues:
The Greek economy is continuing to struggle to emerge out of recession, years into a strict austerity program after a $300 billion bailout kept the country afloat (and basically kept it in the euro zone and the EU itself).
The far-left Syriza party is vowing to totally turn away from austerity — and it’s ahead in the polls. The party says it will renegotiate government debt, slash taxes, reverse pension cuts and increase public spending — basically a complete turnabout to the current government’s policies.
Renegotiating debt isn’t a simple matter. The party must persuade the European Commission, the European Central Bank and the International Monetary Fund to ease the terms of the country’s debt.
The main power in Europe, Germany, is taking a hard line and saying that no matter what the outcome of the election is, there will be no turning back and there is “no alternative” to structural changes.
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“New elections change nothing about the agreements that the Greek government has entered into,” said German Finance Minister Wolfgang Schaeuble. “Any new government must stick to the contractual agreements of its predecessors.”
The EU is on edge. The EU and IMF demanded the austerity measures after the bailout helped Greece pay its debts. Fears are that Greece could be forced to leave the euro zone (and go back to the drachma, perhaps) and could even be forced to leave the EU, although Syriza leaders have said they want to keep the country in the euro zone. If it were to exit the euro zone, it would be the first country to do so since the advent of the currency. And once that taboo is broken, other troubled economies might follow.
The Athens stock market has sold off, and 10-year bonds jumped to above 10 percent yields (in the 2010 crisis, yields were above 11 percent). Unemployment is more than 25 percent. The spillover effect has helped send the euro to below 1.19, a nine-year low.
Stan Shamu, a market strategist at IG in Melbourne, Australia, put it this way:
“Greece could spoil the party in coming weeks as talk of a ‘Greek exit’ resurfaces. The past year has been hard enough for the European Central Bank as the region fought severe economic challenges and attempted to resuscitate growth. … Investors will be monitoring polls very closely heading into the elections. Opposition party Syriza has already started being vocal, talking about a Greek debt haircut and cancelling the austerity measures and bailout package.”
Other matters are also affecting the euro at this time, particularly the continued struggles of the European economy and hints that the ECB will expand monetary stimulus measures to get the Continent moving again. But the Greek elections will warrant watching. Even with a Syriza victory, the magnitude of that victory will be worth taking note of, as will any comments by party leaders post-election.
The outcome in Greece won’t determine the fate of the euro zone by itself, but it’s just another piece of uncertainty that Europe doesn’t need at this time and could cause even more damage to the Continent’s currency.