Today, New Democracy (ND) leader Antonis Samaras will try to form a government. If he succeeds, an immediate disaster scenario will have been avoided. The question is: for how long?
Yesterday, the centre-right ND party narrowly defeated the radical left wing Syriza party in the second Greek election. A coalition between ND and the center-left Pasok party would command enough seats in parliament to give it a small working majority (a target that the two parties just missed in the May election).
There’s still a risk that the process will once again descend into the type of chaos that followed the first election. It’s not a foregone conclusion that Pasok will be willing to join an ND-led coalition—it previously called for a national unity government involving Syriza. Not surprisingly, Syriza has rejected these overtures and will continue to oppose the European Union/International Monetary Fund bailout from the sidelines—hoping to benefit from any false steps made by the new government.
Given the high stakes involved, there’s a good chance that ND and Pasok will eventually form a government, perhaps also involving the Democratic Left party. If so, the immediate disaster scenario will have been avoided and the financial markets will breathe a sigh of relief.
How long this will last, though, is a very different matter. First, it’s not clear how stable such a government would be. Second, it must now be clear to all concerned that the Greek fiscal reform program is failing and that a radical rethink is necessary. Third, the sovereign-debt crisis has now spread well beyond Greece.
The good news is that there is growing acceptance that the Greek program needs an overhaul—including in Germany, where there have been hints that Greece could be given more time to complete its fiscal adjustment. But the risk is that changes to the program will not go far enough, and that the economy will continue to crumble. If euro-area leaders are to avoid a Greek exit from the euro, they will have to face up to the fact that the current program is not working and quickly find a credible alternative.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.