Observations on the Greek Election and the European Central Bank – Part Two

Less than a week after the ECB announced an expanded asset purchase program, the Syriza anti-austerity party won the Greek election on Sunday January 25, 2015 led by Alexis Tspiras who would be the next prime minister. The Syriza party is staunchly anti-bailout, and as a result the election rattled equity markets and triggered a loss of nearly 4 percent on the Athens Stock Exchange as well as elsewhere in Europe. 

As cited by The Telegraph and other EU news outlets, Mr. Tsipras has promised to renegotiate Greece's massive bailout agreements, but has promised not to take any unilateral action against lenders from other eurozone countries. The Syriza party also vows to fight the European Commission, the IMF, and the European Central Bank and force them to forgive some Greek debt and allow the country to enact a program of stimulus spending, among other reforms. According to certain commentators, the only leverage Greece has is to threaten to exit the euro, an act that would surely cause a banking crisis and a severe recession—at least in the short term—in Greece without doing much broader damage to the eurozone economy. The newly elected representatives in Greece will surely be blamed for such an action, and polls indicate that despite Greece’s economic troubles, a majority of citizens want to remain in the euro.

Markets are shrugging off the news because they still view the chances of Greece leaving the Euro as remote. “The new government will find that the Troika (the EC, IMF, and ECB) plans to play hardball,” says Tom Elliott, International Investment Strategist at deVere Group. Elliott argues that Greece has little leverage in its negotiations with its debt holders. It has a 4.5 billion (euro) bond maturing in March and two similarly large payments due in July and August, which it won’t be able to pay without aid from Europe. While its debt holders might be willing to extend the maturity on these debts or lower interest rates, the Troika won’t budge on debt forgiveness out of fear that it would encourage other debtor nations to ask for similar concessions. “This was a huge landslide, a larger win than pretty much anybody expected,” says Ian Bremmer, president of the Eurasia Group. “And this party has taken one of the most directly anti-German, anti-European positions you could take, not just economically but politically.”

The anti-EU sentiment isn’t just a product of the depression-like conditions that Greek citizens have been enduring. In Spain, where elections at the end of 2015 will have huge implications for the future of the eurozone, another anti-bailout party, Podemos, has been gaining support. In France, polls indicate that the far-right eurosceptic Marie La Pen would win the first round of the 2017 French Presidential elections if they were held today. Even Germany, the stalwart of the status-quo, has an ascendant anti-euro party, called Alternatives for Germany, which recently won big gains in state elections.

So, while Greece’s election results will not likely to be a catalyst for a sudden breakup of the Euro, they can be viewed as yet another in a series of events that suggest that the union is failing. Sunday’s elections offered another example of the “disintegration and fragmentation of Europe as an effective source of government,” Bremmer says.

The one thing that could project the EU back toward greater unity and a renewed sense of common purpose is economic growth. But even in the wake of the announcement of stimulus measures from the ECB, there isn’t a great deal of good economic news to report in Europe. The European Union estimates that the eurozone economy expanded at a very low 0.8% last year and will only grow by just 1.1% this year. With widespread unemployment in countries like Spain, Greece, and Portugal, and a banking system that remains undercapitalized, there’s little reason to believe that the European economy is going to improve enough in the coming months such that mainstream parties can stem their losses at the polls.

Observations then for U.S. investors and business to consider is that while the markets might be stable presently due to the massive bond-buying program the ECB announced on January 22, the long view for the EU looks more uncertain than it did two weeks ago – and with regard to capital market growth, foreign investments in businesses, the stability of interest rates and currency, additional risk of governmental regulation, and sovereign debt levels.

For more information on this topic, please see Part One  or Part Three.