While all eyes were on the French Presidential election this past weekend, what took place in Athens is far more concerning. Official projections say center-right New Democracy and Panhellenic Socialist Movement may win just enough seats for a majority in 300-seat parliament.
That means that Greece will be unable to assemble a coalition government strong enough to honor the austerity measures that were spelled out in the terms of the most recent bailout agreement.
The agreement calls for Greece to cut its budget by as much as 7% of their GDP, something that will require a government coalition that fully supports the need for austerity. Without that kind of commitment, the bubble gum and bailing wire fixes now in place will come undone, and Greece's debt crisis will once again rage.
The task of building a coalition government is made even more complex because a number of representatives from extremist parties were swept into office, including some Neo-Nazi hooligans from the Golden Dawn party.
The turmoil of austerity combined with depression caused a backlash of voters angry with the central entire political fabric of the country. With the center right and left parties being blamed for present circumstances in Greece, the voters were open to politicians offering solutions to the vexing problems of the country that involved less personal pain and suffering.
Today, as financial markets opened in Athens, share prices fell by nearly 8%, more than in 2008 when Lehman Brothers collapsed.
Following two bailouts since 2010, the Greek debt amounts to 266 billion euros and is held by the European Central Bank (ECB), the International Monetary Fund, and euro-area states. The terms of the final bailout include a strict austerity provision, insisted upon by Germany, that includes pension and wage cuts.
Speaking on behalf of the European Commission, Pia Ahrenkilde-Hansen said, "The commission hopes and expects the future government of Greece to respect the engagements Greece has entered into."
Amadeu Altafaj, spokesman for EU Economics Commissioner Olli Rehn added, "We think that Greece must remain a member of the euro area, but everybody has to carry out his responsibilities here." Altafaj made it clear that the terms of the bailouts were not subject to renegotiation, a demand made by many winners of Sunday's election.
"This is the deal that is on the table," Altafaj said. "It is an unprecedented effort in terms of solidarity. . . (NYSEARCA:AND) solidarity is a two-way street."
The situation has become politically polarized. On one side, there are the people of Greece who are so opposed to the continuation of the harsh austerity measures imposed by the bailout agreement; on the other side is the EU who has dug its heels in the sand and refuses to renegotiate the terms of the agreement.
Will Greece Leave the Euro zone?
According to Guillaume Menuet and Juergen Michels, two economists with Citigroup, Inc., there is a 50% to 75% likelihood that Greece will exit the euro zone sometime within the next 12 to 18 months.
"Every country can decide to leave the common euro area, of course Greece can as well," Austrian Chancellor Werner Faymann told state radio ORF. "You just have to know what it means - and the Greeks will have to consider that."
While it is true that, under the terms of the Maastricht treaty, there is no formal way of leaving the EU, Greece could simply default its obligations under the bailout agreement, or the EU could withhold funds and force it out.
But leaving the EU would significantly add to the problems of the financial beleaguered nation. In September UBS economists did a thorough study citing the possible consequences of a euro breakup. Their insights are also valuable in assessing the likely consequences of the exit of individual member states.
The UBS report contends that if a weak country (such as Greece) were to leave the EU, the exiting country would risk a number of crippling economic consequences. Among them: sovereign default, corporate default, collapse of the banking system and collapse of international trade.
They conclude that there is little prospect of devaluation offering much assistance by way of inward investment - partly because disgruntled neighbors might not inclined to invest. They estimate that a weak euro country leaving the euro would incur a cost of around €9,500 to €11,500 per person during the first year and €3,000 to €4,000 per person per year over subsequent years. A weak county like Greece would risk losing 40% to 50% of GDP in the first year. A strong country would risk 20-25% of their GDP in the first year by leaving.
The Bottom Line
There are no easy fixes to the Greek dilemma. However, if an answer is to be found, give-and-take will be necessary on both sides of the fence. Both sides have much to lose if the situation is not resolved amicably.
While leaving the EU is an option for Greece, its leaders should make every effort to inform citizens that doing so could significantly add to their collective misery. Likewise, a less harsh stance by the EU in its position on renegotiation would be helpful.
Decisions made in the next few weeks by those involved will have far reaching implications for Greece and for the EU. And the contagion resulting from bad decisions will impact the economies of the world.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.