The Greeks Have Voted, So What's Next for the Eurozone?
The Greek election result means Greece is likely to stay in the Eurozone, for now, anyway. Far from being over, the Euro crisis rumbles on.
At the very last minute, staring into the abyss, it seems the Greek electorate has decided to stay the course of austerity – at least for the time being. A Greek exit from the Euro, although still odds on, has been pushed back – certainly by weeks, perhaps by months. A little tinkering of the bail-out conditions will be allowed and the Germans will continue, reluctantly, to bankroll the Greek state for now.
But this is not the beginning of the end of the Euro crisis. The recent history of the crisis has shown that once the market’s attention switches from one country, it focuses on another. In the aftermath of the surprisingly conclusive Greek election results both Spain and Italy found their borrowing costs go up. The story of the next few weeks and months may not be centred on Athens but instead on Madrid and Rome.
The central truth of this crisis is that it’s about long term trends. In a world where the West is finding it harder to stay competitive, governments are committed to a certain base level of spending through their welfare programmes – which require a sustained level of economic growth and the willingness of markets to lend them this cash when tax receipts fall short. And that is exactly what has been happening since the financial crisis of 2008, but the game plan has broken down.
In short, the reaction to deficits has been to cut spending but this has only exacerbated economic depression – Greece for instance has seen a fifth of its GDP disappear in three years – which makes it impossible to balance the government’s books, prompting more austerity as market watchers believe that the ever mounting debts won’t be repaid.
Many countries in the Euro are in this vicious circle of decline and the two routes out are to continue with austerity until market confidence is restored, or to devalue the currency through a Euro exit, which in itself could bring huge chaos. For the moment the Greeks have chosen course number one.
Spain’s situation is, from a European perspective, much more worrying than Greece’s. Here is a big economy which is in depression – with six million out of work – with a banking system which, unlike the UK and US, didn’t write down its bad debts post-financial crisis, hence the 100million euro bailout announced recently (although no one is sure yet where this money is really coming from).
Again, without the ability to devalue its currency, it seems the only way is down for this economy. And the chances of being pulled up by the bootstraps by growth in its trading partners such as France and Germany is being hit by the sense of crisis pervading the Eurozone. But exit from the Euro is no soft option for any of its members.
Dr Mark Mobius, executive chairman of Franklin Templeton Investments and for the past 40 years the trailblazer for investment in emerging markets such as China and India, offers insight into the economic situation. He says that any country exiting the Euro would see a mass devaluation of its currency, which could mean that these developed economies slipping to the size and status of emerging economies, such as South Africa or Nigeria.
The stakes are getting higher in the Eurozone crisis and the Greek election results potentially only put the day of reckoning off for one of its members. This is a crisis set to run and run.