By J. Paul Horne, Independent Market Economisthttp://www.europeaninstitute.
Europe must be grateful to Greece for dramatizing: how the Euro is fundamentally flawed; how the Euro’s failure could cause a financial-economic disaster; and how European Union (EU) leaders must, despite all their differences and electoral setbacks, cooperate to avoid a Greek tragedy.
This week will be crucial in determining not only Greece’s future but that of the Euro zone. Unless the principal Greek parties reach a surprise compromise on a coalition government, there will be new elections on June 17. Voters, infuriated with a 20% decline in GDP and soaring unemployment (close to 50% for young people), are likely to reject again those parties willing to implement the tax increases and pay cuts agreed to in February in return for a second € 170 billion ($218 billion - calculated at this morning’s market rate of $1.287 per €) bailout. On May 6, voters gave the New Democracy and PASOK socialist parties only 32% of the vote, compared with an average 80% since 1974. The new election would certainly lead to a government that would reject more austerity and try to roll back current measures.
The “troika” of Greek creditors: the European Commission (EC), the European Central Bank (ECB) and the IMF would then have to renegotiate the bailout agreement in time for Greece to meet major debt servicing due in September, or refuse any change in the February agreement. If the new government then defaulted on servicing its loans from the EC, ECB and IMF, Greece would lose all access to international credit with which to buy food and oil; and its banking system would collapse. Unless Euro zone governments and the ECB relented on austerity, Greece would effectively be forced out of the euro, even though 70% of Greeks say they wish to remain in the Euro zone.