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Scylla and Charybdis: The Greek Choice

June 28, 2012

In the Odyssey, the eponymous hero faces a choice between two threats when navigating the Strait of Messina. The six headed monster Scylla and the deadly whirlpool Charybdis were located close enough to each other that evading one meant facing the other.  Passing too close to Charybdis meant the entire ship would likely be sunk, while some men would certainly be lost on the path through Scylla. The uninviting choice facing Greek voters going into the election this past weekend reflect the situation Odysseus faced; attempting to navigate the least harmful path forward with unavoidable danger looming. The two leading parties embody this uninviting choice for the Greeks; fear of a messy exit from the Euro against a desire relief from the harsh, prolonged austerity that has been taking its toll on the Greek people since the onset of the crisis. Radical anti-bailout party Syriza had vowed to tear up the previously agreed upon austerity package required by the troika, an action that would almost certainly lead to a rapid exit from the Euro, setting off a new crisis that could have wide-ranging and devastating consequences. A New-Democracy victory offers no similar threat of catalyzing the next crisis to ensnare Europe, they have stressed that a vote for them is a vote to stay in the Euro and not turn their back on the agreement with the troika.

 

Six weeks after a previous election failed to produce a governing coalition, worries among European leaders simmered that upstart party Syriza would ride the momentum from their unexpectedly strong showing in the previous round to snatch victory from the pro-bailout establishment. Center–right party New Democracy and their leader Mr. Samaras emerged victorious with 29.7% of the vote, about 3 percent more than Syriza and enough to attempt to form a coalition government. European leaders and Euro supporters hailed the results as a triumph. Mr. Samaras touted the win as a ‘victory for all Europe’ and President Obama hailed the results as a ‘positive prospect’ for Greece.

The celebration was short-lived, as the temporary exultation at narrowly avoiding a new catastrophe quickly gave way to sober realization. With the New-Democracy victory, Greece has managed to evade the Charybdis of a Syriza win, but while Greece avoided causing a new crisis, the election did nothing to solve the pervasive problems they have been struggling with since they were first locked out of capital markets in 2008. The day after the election, financial markets initially rallied on the news of the election results, but within hours, Spanish borrowing costs reached new euro-era highs and Italian bond yields were driven above levels considered sustainable. This continues the trend from the Spanish bank bailout, where the announcement of a $125 billion injection into troubled Spanish banks only calmed the markets for less than five hours before the upward pressure on the borrowing costs of Spain and Italy continued inexorably. While n the past, bailout announcements or positive election results would placate the market until the next crisis flared up, now the market panic returns the same day, as investors recognize that neither election results nor the next in a seemingly endless line of bailout announcements will solve the deep structural problems plaguing the Euro, only comprehensive reform could. Regardless of who won this past Sunday, Greece still faces a rigid labor market with high levels of unemployment, unsustainable levels of national debt and a crippling recession with no clear path back to prosperity.

 

In the more immediate sense, New-Democracy and the governing coalition that it looks likely to form with Pasok and Democratic Left faces the problem of securing the rest of the previously promised bailout funds the country needs to function while simultaneously trying to renegotiate the conditions to soften some of the austerity measures required to receive the funds. They will be hindered in their efforts by Syriza’s refusal to join the coalition, as the Syriza-led opposition will fiercely oppose continuing the bailout deal as it is, and will put increasing amounts of pressure on the governing coalition to renegotiate the deal. The list of measures that Greece needs to comply with under previous bailout agreements is long and substantial. According to the much discussed IMF Memorandum of Understanding “prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget.” These measures amount to about €3bn, or 1.5% of GDP and almost 7% of GDP in additional measures will be needed to attain the 2014 fiscal target. Some EU officials had indicated that it might be possible to relax some of the deadlines, or soften some of the requirements, but German Chancellor Angela Merkel recently told reporters at the G-20 summit: “The important thing is that the new government sticks with the commitments that have been made, there can be no loosening on the reform steps.” It remains to be seen who will wield more leverage in the forthcoming negotiations between the newly formed government and the European powers that be, but significant changes to the agreed upon measures are far from a certainty.

 

The Greeks have managed to avoid plunging into a new crisis, evading the Charybdis of a euro exit, but there is still much pain an uncertainty ahead. Odysseus said that what he witnessed following his choice between Scylla and Charybdis was ‘the most pitiable sight’ he saw in his entire journey home. Hopefully with their version of Scylla and Charybdis, inescapable choice between the certain pains of austerity and the catastrophe of a likely Euro exit, the Greek people can avoid such a harrowing outcome.

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