Greece’s moment of truth

It is difficult to overstate the importance of Greek Prime Minister Antonis Samaras’s decision to bring forward the date of the parliamentary vote on the election of a new president. Not only does Greece’s future within the eurozone crucially hinge on this vote, but so too does the future of the eurozone as a whole. Failure by Samaras to muster the supermajority needed to elect a new president could set the stage for the far-left Syriza Party soon coming to power. And such an event would have the real potential for plunging Greece into economic turmoil and for restarting the European sovereign debt crisis.

{mosads}Yesterday, against the backdrop of difficult negotiations with the “troika” (Greece’s domestically despised international official lenders, consisting of the International Monetary Fund, the European Union, and the European Central Bank), Samaras brought forward the parliamentary timetable for voting on a new president. He ostensibly did so to limit the period of political uncertainty that would otherwise have prevailed in financial markets had he allowed the parliamentary vote to take place on schedule in February. It is now proposed that the three rounds of parliamentary voting will begin on Dec. 17 and end on Dec. 29.

Under Greece’s constitution, a two-thirds parliamentary majority is required to elect a new president in the first two rounds; a three-fifths majority is needed in the third. Failure to attain such a majority by the third round would automatically trigger a general election. Since the Samaras coalition government presently only has 155 seats in Greece’s 300 member parliament, Samaras will need to persuade 25 opposition members to support him in his bid to avoid a general election. To do so, he will presumably have to commit himself to taking a very tough stance in future negotiations with the troika against additional austerity and structural reform measures.

In the event that Samaras failed to muster the necessary votes and had to call an election, it is highly probable that Greece would face an extended period of political uncertainty. For a start, financial markets would fear that Alexis Tsipras’s far-left Syriza Party, which is presently enjoying a comfortable lead in the polls, could very well come to power. Such a victory by Syriza would almost certainly lead to a direct confrontation between it and Greece’s German paymaster, as their respective views on appropriate economic policy management could not be further apart. However, even were Syriza not to win the election, Greece could have many months of political uncertainty, since it is more than likely that no party will win sufficient votes to form a stable majority government.

Greece’s already battered economy can ill-afford a prolonged period of political uncertainty, and much less a radical government, especially without the backstop of a troika financial support program. For not only does Greece have substantial official debt amortization payments to make in 2015 — it is also vulnerable to a run on its bank deposits. This would especially appear to be the case in light of the recent Cypriot experience, where Cyprus’s official international lenders insisted on a large write-down of bank deposits in return for their financial support to the country. Without a troika program in place, Greek banks would not be in the position to access the European Central Bank’s rediscount window, or in the event of a bank run that would almost certainly lead to the further collapse of the Greek economy.

European optimists might argue that any spillovers now from a Greek crisis to the rest of the eurozone would be limited. However, in so doing they would be overlooking Europe’s very poor economic and political fundamentals, which make the eurozone all too susceptible to renewed contagion from the Greek crisis intensifying. After all, Europe is on the cusp of yet another economic recession and of a prolonged period of Japanese-style price deflation. Meanwhile, its economic periphery remains highly indebted and throughout Europe support for its political elite is crumbling at a time that the extreme-left and the extreme-right appear to be on the march.

The stakes for both Greece and the eurozone as a whole in the Greek parliament’s forthcoming vote on a new president would appear to be unusually high. For that reason, one has to hope that Antonis Samaras succeeds in pulling a rabbit out of the hat and avoids Greece having to go to the polls. Otherwise, we should brace ourselves for a very rough ride, not only in Greece but in the European economy as a whole.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.