The spin was fine. The Greek people had voted to save the Euro. The “right” parties had enough seats and votes to form a government which would support the loans which support the Euro membership. The spin was designed to reassure markets that the Euro is safe in our time.
The markets did not see it quite like that. Initial sharp rallies petered out. The cost of borrowing for Spain and Italy rose further. In Spain’s case the cost of 10 year money remained clearly above 7%, the level that many say makes it unaffordable. The battle for Spain is now more important than the rows over Greece.
The politicians gave out differing messages when interpreting the Greek election results. The Greek “victors” sounded more like the Greek opposition, saying there now had to be changes to the loan agreements to make it easier for Greece to survive economically. Germany repeated the mantra that Greece had voted for the Euro and for the disciplines embedded in the loan agreements. In the days ahead Greece has to form a Coalition government, that government has to seek changes to the loan terms, and the rest of Euroland has to respond. If they are too generous to Greece they may find other nations with special programmes want better terms. If they are too tough they make it difficult for the new Greek government to sell it to the Greek people. If they are too generous to Greece they call into question the disciplined framework which many- not just in Germany – think essential to Euro success. If they demand too much austerity with no currency or monetary relaxation possible to compensate, the Greek economy could continue to fall badly, making it impossible to pay for all the remaining debts.
Most of this is theatre. It is based on an unlikely set of assumptions. The Greek loan agreements for the period up to 2020 are based on the assumption that the Greek economy starts to grow from the beginning of 2013, and carries on growing for each of the seven years up to the end of the decade. Few private sector forecasters would endorse such a forecast for such a long and unpredictable time period. If by any chance the Greek economy does not soon embark on a steady and long period of growth, all the numbers of the loan agreement will be wrong. Tax revenues will be lower, state spending higher, and Greece will need to borrow more to get through.
It all asumes that the Greek banking system copes well with the pressures. Let us hope it does. However, some in Germany are nervous about the extent to which large German bank surpluses are being lent via the European Central Bank to the weaker members of the currency union. Somehow the deficits on trade accounts need to be financed. Somehow plenty of money needs to be supplied to banks in weaker economies to meet demand for cash withdrawals or transfers as they arise. The surplus countries have to allow this to happen and to be happy with it for the union to flourish.