Depending on how you look at it, Greece has either pulled back from the precipice or has lost a vital bargaining chip.
The world closely watched Sunday’s election, waiting to see if the Greeks would reject austerity once and for all or not. If they did, it could have led Greece to the leave the euro zone, causing a jolt to the world economy.
In the end, the Greeks — narrowly — opted for the safer course. They backed the pro-bailout parties.
The conservative New Democracy party just barely beat the leftist Syriza party to first place after a closely fought contest that saw both sides presenting very different ideas of how to deal with the crisis.
New Democracy’s leader, Antonis Samaras, said that Athens had to stick to its agreement with its international lenders if it wanted to find a better deal. Syriza’s leader, Alexis Tsipras, argued that this was the path to ruin and that only by rejecting that agreement had Greece any hope of getting out of its deep recession.
Crucially, New Democracy also portrayed the election as a de-facto referendum on euro zone membership, something that 80 percent of Greeks say they want to hold on to.
Fears of the potential risk involved with leaving the euro zone appear to have given Samaras the win. New Democracy secured 30 percent of the vote against Syriza’s 27 percent, and in doing so won a crucial bonus of 50 extra seats in parliament. That puts it in a strong position to form a government most likely with center-left PASOK, which secured just over 12 percent, and possibly also with other smaller parties. Coalition talks are to start on Monday.
“The Greek people voted today to stay on the European course and remain in the euro zone,” Samaras said in his victory speech on Sunday night. “There will be no more adventures. Greece’s place in Europe will not be put in doubt.”
Yet by supporting the pro-bailout parties, Greeks have chosen to bring back to power the very politicians they severely punished in the last vote, just six weeks ago, on May 6.
Voters vented their fury at the parties that had alternated power for almost 40 years since the overthrow of the junta. They are both regarded as bearing a huge responsibility for mismanaging the country’s finances and for then imposing harsh austerity at the behest of the troika of international lenders: the European Central Bank, European Union and the International Monetary Fund.
There appears to be no end in sight to the country’s woes. The economy has been contracting for five years, unemployment is at 22 percent and the measures taken so far are widely regarded as having exacerbated the situation.
Syriza and its charismatic leader, Tsipras, pledged to lead Greece out of the crisis by tearing up the memorandum signed in March to secure the second bailout of 130 billion euros, following a 110 billion euro rescue package in 2010.
At the same time Syriza insisted that it wanted Greece to remain in the euro zone.
Although New Democracy and PASOK rejected Syriza’s calls to abandon the agreement, they campaigned on the basis that it could be renegotiated. Their argument was that Greece was better off searching for some kind of adjustment while sticking to the deal rather than pursuing the confrontational course that Syriza supported.
New Democracy argued that a Syriza-led government would inevitably cause funding to be cut off and a return to the drachma, Greece's former currency. All the talk of a Greek exit from the euro zone prompted many to withdraw their cash from banks — to the tune of around $750 million a day.
Fear grew that if the far-left emerged as victors, a massive run on Greek banks would force Greece out of the euro zone, since once the banks ran out of euros, the Greek state would have to print its own money.
However, Syriza accused their opponents inside and outside Greece of scaremongering and argued that the EU was bluffing and would never allow Greece to exit the euro zone, which could have lead 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.