A change for the better?
Victory for pro-bail-out party in Greece overshadows significant gains for the Socialists in France.
The result of Greece’s general election yesterday (17 June) suggests that the European Union’s response to the sovereign-debt crisis is unlikely to change significantly in the short term.
The slim victory for the centre-right New Democracy – now expected to form a coalition which its traditional rival, the centre-left Pasok – is a triumph for the status quo and offers little hope to those wishing to see a shift away from the German-led focus on austerity and incremental change.
Both Greek parties say that they want to renegotiate the terms of the country’s bail-out, but it is unlikely that there will be any radical alteration.
No wonder Angela Merkel, Germany’s chancellor, and her finance minister, Wolfgang Schäuble, welcomed the result so enthusiastically. At the same time, they made it clear that Greece had to stick to the conditions of its €130 billion bail-out.
The developments in Greece overshadowed the second, decisive round of legislative elections in France yesterday, where the Socialist party of François Hollande, the president, won an absolute majority.
The outcome gives Hollande a strong democratic mandate. The result indicates that there is potential for a change in approach to the sovereign-debt and banking crisis, and this goes to the heart of the delicate balance of power in the eurozone. While Germany holds the cash, Hollande – together with Mario Monti, Italy’s prime minister – is leading the debate on EU treaty change and fiscal integration.
Hollande comes to his second European Council next week (28-29 June), having made a clear statement of intent by overturning his predecessor’s plan to raise the statutory pension age from 60 to 62, and calling for the EU to agree a €120bn fiscal stimulus, by boosting the European Investment Bank and redirecting unspent EU structural funds.
The balancing act between Germany’s preference for a step-by-step approach to change in the eurozone and the more radical shift supported by France, Italy and the European Commission, will be played out when leaders of the G20 group of industrialised and emerging economies hold a summit in Los Cabos, Mexico, today and tomorrow (18-19 June).
Once a coalition has been formed in Greece, officials from the ‘troika’ – the Commission, the European Central Bank and the International Monetary Fund – will return to assess the implementation of the bail-out agreement for the first time since the first Greek general election on 6 May.
This morning (18 June), financial markets gave little indication that they felt reassured by the outcome of Greece’s election. After a brief rally, Spanish and Italian ten-year bond yields rose. Spain’s broke its previous euro-era record, set last week, above 7.1% – close to the levels seen in Greece, Ireland and Portugal when they were forced to request full bail-outs.
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