Impact of Greek Election Outcome on EU Integration, Euro and the Markets
Impact of Greek Election Outcome on EU Integration, Euro and the Markets
Q. “ The recent victory of the radical left-wing Syriza party in Greece will harm EU integration, more than benefitting it.” Discuss in the context of the Greek election outcome this year and assess the impact of Tsipras victory on the Euro and the markets.
A. Impact of Syriza’s Win in Greece on EU Integration
About Greek Elections
• Greek radical left-wing leader Alexis Tsipras was sworn in as the PM of hardline, anti-bailout government
• Elections were won by radical left-wing Syriza party in Greece
• First time member of the Eurozone will be led by parties against German backed austerity
• Decisive victory for Tsipras, Greek’s youngest and radical left-wing leader
• Syriza campaign based on motto “Hope is coming!”
• Coalition deal secured with small Independent Greek parties opposing EU/IMF Aid Programme
• Syriza won 149/300 seats in the Parliament just two seats short of a majority and in need of a coalition partner
• Independent Greeks won 13 seats
Impact on EU Integration
I. Negative
1. Greece Parties Uniting Against EU Already
• Greek coalition united by mutual opposition of the Euro 240 billion bailout programme keeping Greece in place at the price of budget cuts
• Alliance with hardline stand against Greece’s creditors
• Fringe party now at the helm edging out New Democracy party of Samaras and centre-left PASOK
2. Turning Point in Eurozone Crisis
• Move from budgetary rigour to other methods of coping with EU crises
3. Party Strongly Anti-Bailout
• Greek PM Tsipras has also chosen bailout critic as FM
• Signalled tough stance on Eurozone lending;Efforts to write off massive chunk of rescue debt
4. Credit Rating Negative For New Greek Government
• Moody’s has rated the election win as a credit negative saying it will increase risk to EU in terms of:
• Financing
• Economic Growth
• Bank Liquidity
• Policy uncertainty is also high on the list of problems of the Tsipras government for the EU
5. Greater Chances of Grexit (Greek Exit) From Euro
6. Greek Win Likely to Encourage Europe Fringe Parties
• The success of Tsipras’ party is going to empower European fringe parties
• Anti-austerity movements across economically depressed south on the rise
• Defeat of the EU integration philosophy
• Result of the growth versus budget debate at the expense of voters
• Syriza victory a major positive news for anti EU parties such as:
• Podemos (Spain)
• Five Star anti establishment Beppe Grillo (Italy)
• Sinn Fein (Ireland)
7. Possible Motivation For Brexit (Britain exit) and Spain Exit from the EU
8. United European Left which was Once Politically Divided
• Strategic alliance now possible between the centre-left to counter the far-right
9. Euro Reacts Negatively
• Euro slumped to 11 year low in Asian trading while Greek stock markets fell 5% in volatile early trading
10. Election Result Increases EU Economic Uncertainty
11. Syriza Promises Incompatible with Current Demands of Eurozone Members
12. Fragmentation May Spur Fallout of Monetary Union
• Defaults of Greek would trigger collapse of banks, capital flights and capital controls
13. Threat to the Traditional EU Integrationists
• German Chancellor Angela Merkel, French President François Hollande, British prime minister David Cameron: Pro EU Bailout
• But Tsipras: Against EU Bailout
• Anti-mainstream mavericks now leaders
14. Tsipras’s Rejection of EU Terms
• Tsipras wants an end to the rescue programmes of the ECB, EU Commission and IMF
15. Shift in Eurozone Policy Making
• Leaders on the Centre-Left such as Hollande and Renzi will be replaced by EU critics such as Tsipras
• Neutralisation of domestic Eurosceptic and anti-establishment forces harder now
16. EU an Unattractive Proposition
• EU has no growth and high unemployment
• Anti-European parties like Syriza capitalising on this
II. Positive
1. Challenging Status Quo Necessary
• Financial austerity policy major roadblock for EU
• Challenging it may help to counter its drawbacks and contribute to more populist measures
2. Meeting Needs of Post Financial Crises
• Austerity based EU integration must evolve to meet needs of post financial crisis EU
3. Need to Counter Anti Establishment Movements
• EU integrationists need to meet the challenges of the anti-establishment movement across the union
• Necessary for latter to have representation in national and EU office for healthy opposition
4. Greek Win to Counter Biased Implementation of Maastricht Treaty
• 1992 Maastricht Treaty has been characterised by financial austerity
• Its implementation has been driven by will of stronger EU member nations such as Germany
• Anti austerity parties an expression of social backlash to biased implementation of austerity measures
• Twin measures of austerity and cost containment the basis of financial integration as per the Maastricht Treaty now outmoded in post recession and global financial crisis era
• Time for re-invention of EU policy and procedures
5. Win Could Create a More Humanitarian and Resilient EU
• For EU to survive, it needs to become more humanitarian in its approach to debt ridden nations such as Greece
• Changes need to be made to EU and austerity management policy at national country and EU level
• Many EU nations on brink of collapse for example: Greek output has fallen 30% since 2008
• Peripheral Europe has suffered since a long time and EU region has to transform itself and meet their needs to survive
6. Numbers Tell Their Tale: EU in Need of Crisis Resolution
• Aggregate economic growth numbers of Euro region extremely low
• Tell of a crisis between member states between the stronger(core) and weaker(periphery) states resulting in fractured, two tiered EU
• EU now comprising creditors and debtors, Greek win could end the close the gap between the two through policy reformulation
7. Greek Win Provides Clues to EU Integration Challenges
• Much of the problems which spurred the Greek win stand in the way of EU integrations much as:
• Labour markets: High absolute employment, youth unemployment, long term unemployment and brain drain
• Lack of sustainable recovery unless there is a more reform oriented approach
• Without growth and investment, undertones is not resolved easily
• Greek debt problem=EU debit problem
• Greek call for European debt conference a possible solution to the crisis
8. Syriza Pro-Euro in Many Ways
• Greek party does not want poverty and despair for its people
• Grexit can and will be avoided if populist, anti-establishment parties express themselves and find their voices heard
9. Markets Recover, See Chances of Grexit as Remote
• Markets still view the chances of Greek exit from EU as remote
• Greece has very little leverage on negotiations with debt holders
• Nature of debts:
- €4.5 billion bond maturing in March
- Two more payments in July and August
- Payments not possible without aid from EU
• Debt holders may be willing but EU Troika (Merkel-Hollande-Cameron) will not promote debt forgiveness
• Way out of deadlock could well be positive for the EU
10. Greece Has Limited Options, EU Has The Advantage
• Greece may threaten to exit the Euro, but this will cause:
• Banking crisis
• Recession
• Greek citizens want to remain with EU: Polls
• EU can easily leverage these advantages to its benefits
11. Economic Growth
• Sincere efforts to break the deadlock could spur economic growth and common political purpose
• This could embolden EU integration
B. Impact of Greek Election Outcome on the Euro and the Markets
a. Impact
1. Euro Touches Lowest Level In More Than 10 Years
• The Euro touched the lowest levels in close to a decade against:
• US dollar
• Japanese Yen
• following the Greek election results
• Euro was douwn O.5% against US $ to USD 1.1152 and touched USD 1.1098 earlier, the weakest point till September 2003.
2. Asian Stocks, US Futures Tumble
• Nikkei Stock Average (Japan) fell by 0.6%
• Hong Kong’s Hang Sen fell 0.3%
• Futures for US Stocks were down 0.6%
• Shanghai Composite was down by 0.1%, Stocks in Southeast Asia fell by fraction of percentage point
3. Markets Recovered Following Signs of Low Chance for Grexit
4. Futures for EU stocks were up 0.1%
5. Elections had No Material Impact on Euro area
b. Reasons Behind the Fall of the Euro
• Euro is a largest currency of 19 members of eurozone
• All Greek disputes within framework of Euro, not outside it
• Greek debt worth trillions of dollars to the Eurozone
• Greece may/may not be able to pay debt, taking GDP into account, public debt not sustainable
• Greek default very possible
Conclusion
Regarding EU Integration
• Syriza’s win has benefits as well as drawbacks for EU integration. With Greece’s radical left wing unwilling to compromise so far and the deadline for debt resolution nearing, Grexit, Brexit and EU’s break up remain a concern.
• As indebtedness grows in the EU and the ECB introduces the QE programme to counter the deflationary trends,the Greece victory points to the deeper issues at the core of EU integration. In sum, the recent win of Tsipras and his anti-mainstream mavericks could well pave the way for the end of the EU, or a new beginning for it.
Regarding Euro and Markets Impact
• The Euro was affected to some extent by the Greek elections as the likely signs were there that a default is likely. This is because Syriza’s Tsipras is even more averse to the austerity measures and painful bailout programme than the Conservative Party’s Samaras. There is very little chance of Greek agreeing to a bailout measures and giving acquiescence to the Troika.
• On the other hand, markets were less likely to be affected as estimations indicate Grexit is not that likely, given that Greece does not want to leave the EU. Polls conducted among Greek citizens show that EU is their choice for now.
• The challenge here is that Greek government has to find a way to resolve the debt crisis without going back on its promises, while the EU Troika has to come up with a more humanitarian solution for their weaker EU member nations.
• A meeting of minds for common good is the basic aim which EU now must strive for, if it wants to survive. From Marie Le Pen in France to Alternatives for Germany in Germany, even the strongest EU nations are feeling the challenge of the radical, anti EU parties. If the EU has to get past this, some amount of pragmatism must be tempered with objectivity on both sides.
• Markets will be impacted if the eurozone crises is not resolved. Even the QE programme has far reaching effects on the rest of the world. In the absence of effective debt resolution in the EU, every economy will feel the impact to some degree or the other. This in itself should be sufficient motivation for resolution of the EU crises.
