After the Greek Elections

June 18, 2012

Greeks took their fate into their own hands this weekend affirming their support of further fiscal discipline and their desire to remain a part of the euro zone. Greek voters spoke out in favor of the center-right party—New Democracy, which clinched a narrow victory with 29.7% of the vote. The opposition party Syriza, won 26.9%. With smaller parties, such as, the Democratic Left, Independent Greeks, Greek Communist Party and Golden Dawn, gaining support, Greece lacks a clear mandate for the direction of its government.

The next step is for Mr. Samaras to form a coalition government with the second and third most popular parties after Sunday’s election. Alexis Tsipras of the Syriza party declined to partner with the New Democracy party due to disagreement over submitting to austerity measures linked to the bailout package. Mr. Samaras will now begin talks with the Pasok party, which garnered 12.3% of the vote. With the 33 parliamentary seats that Pasok currently holds added to the 129 (due to a 50-seat bonus for the winning party) New Democracy controls, the political parties would be able to achieve the majority of the 300 seats needed to form a coalition government.

The election results most clearly highlight the fear Greeks have of leaving the euro zone and returning to the drachma, Greece’s original currency. In order to remain a part of the euro zone and receive the next installment in the $164.32 billion bailout package, the new government will be faced with either spending cuts totaling 5% of GDP or a renegotiation of terms with the troika—European Central Bank, European Commission, and International Monetary Fund. Under mounting tension from protesters and record 22% unemployment, Mr. Samaras plans to focus on finding an appropriate level of austerity measures going forward that will “give the Greek people room to breath.” He will face opposition from EU officials that are pushing for the completion of a 100-day action plan to include “privatizations, axing public sector jobs, and closing loss-making enterprises.”

A delay in deficit reduction would mean increasing the amount European countries would need to contribute to keep Greece afloat. The G-20 Summit this week followed by a meeting of the finance ministers on the 21-22 and a EU Summit June 28-29 will further determine Greece’s fate (see in depth timeline here). The next few weeks will be a challenge to political leaders across Europe to address the increasing unemployment, shrinking revenue, growing debt, and devastated consumer confidence in Greece as the costs it will impose on its neighbors mounts. Hopefully, the new Greek government will prioritize a reduction in spending to stabilize it’s budget and keep another crisis from forming.

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