Is The Greek Crisis Really Over?

by: Desmond Lachman

A growing chorus of European policymakers, including Mario Draghi, Klaus Regling, and Jose Barroso, keep reassuring us that the worst of the Euro crisis is over. Evidently, they are not paying much attention to the recent political and economic developments in Greece. For those developments are now very much heightening the risk that we will again be talking about Greece leaving the Euro before the year is out.

Among the more disturbing developments in Greece is the country's apparent loss of political willingness to comply with the terms of the IMF-EU financial support program. Negotiations with the troika on that program's review, which should have been completed last September, are yet to be completed. Holding up those negotiations is the Greek government's insistence that it does not have the political support to take the further budget measure or to implement additional economic structural reforms which the IMF is demanding of it as a condition for the next loan disbursement. Greece's primary budget surplus now gives it the luxury to hang tough in those negotiations.

The loss of political willingness to implement further painful reform measures is hardly surprising given the deterioration of Greece's political climate. Due to defections, the coalition government's majority in the 300-member Greek parliament has now been whittled down to a majority of only three members. At the same time, the clearest of divisions are now apparent in PASOK, the government's junior coalition partner, which has to raise questions about the long-run survivability of the government.

Not helping matters is the rise in the polls of Syriza, Greece's political party on the far left, which is now comfortably leading New Democracy in the polls. Nor does it help matters that Syriza is making the forthcoming May 2014 European parliamentary elections and the May 2014 Greek local elections into a referendum on the government. Should the government lose those elections, as appears all too likely, it is difficult to see how the Greek government can avoid having to call early general elections. And were Syriza to win those general elections, it is difficult to see how Greece remains in the Euro.

The apparent unraveling of Greece's politics is hardly surprising given how very deep and long its economic recession has been and given how high its unemployment rate has risen. With very little prospect that Greece will have a meaningful economic recovery this year, one must expect that a continued very poor economic environment in 2014 will contribute further to Greece's political fragmentation. This would appear to be particularly the case now that the Greek economy is succumbing to outright deflation, which one would think must constitute a major headwind to economic recovery.

European policymakers are likely right in thinking that Europe is in a very much better position now to weather another major Greek crisis than it was in 2010. However, it would be a grave mistake to believe that a Greek event would not have major reverberations through the rest of the Euro area.