Italian Prime Minister Mario Monti, who replaced Silvio “What crisis?” Berlusconi last November, is in general agreement with his French counterpart. In Spain, Prime Minister Mariano Rajoy has also been begging for more lenient budget targets, for fear that the Spanish unemployment rate – 24 per cent – will keep rising and trigger nasty social unrest that could end his career. Notably, the €100-billion bank bailout deal he is negotiating with the EU will almost certainly come with no extra austerity demands.
The fresh thinking on austerity in France and Spain has inspired all the Greek parties. Their calls for a new deal on austerity have been given moral legitimacy, they claim, and they may be right. Even some EU officials seem in agreement.
According to various reports on Friday, quoting unnamed officials, the EU and the IMF, the sponsors of Greece’s twin bailouts, are open to the idea of dulling the austerity pain by reducing interest rates on bailout loans and extending repayment periods, among other little goodies. And if Greece succeeds in negotiating a lighter austerity load, you can bet the other countries on life support – Portugal, Ireland and, now, Spain – will demand the same.
There was no sense, however, that they would allow Greece or any other crippled country to shred their austerity programs.
Austerity-lite, of course, could ultimately backfire. Any pullback on efforts to balance budgets would earn the ire of the bond markets if that easing does not translate into growth. Bond investors adore growth, but they also want tight fiscal discipline.
More worrying is the outcome of the Sunday election in Greece itself. If Syriza wins, the question of offering austerity-lite may be moot if the party vows to shred austerity. If New Democracy wins, austerity-lite may be offered, but it may not work, given the dire state of the Greek economy. Greece could still exit the euro zone, unleashing economic and financial fury throughout Europe.
But one thing is certain. No matter who wins on Sunday, the Greek election is the strongest backlash yet against an increasingly discredited economic policy. Will Ms. Merkel acknowledge that austerity isn’t working? The great game of chicken is just beginning, it appears. As the Greek election is too early to call, so is the success of Europe’s anti-austerity movement.
WHAT TO EXPECT SUNDAY
The Greek election on May 7 was an inconclusive mish-mash – no party got more than 20 per cent of the vote and negotiations to form a coalition government broke down. That created a power vacuum that the Sunday election will try to fill.
As of Friday, the two front-runner parties – the centre-right New Democracy and the radical left Syriza – were running neck and neck. It could go either way. Here are four possible election scenarios:
1) New Democracy takes the most votes of any party and nabs the 50-seat parliamentary bonus awarded to the front-runner in the 300-seat chamber. ND forms a coalition with the socialist Pasok party, which came third in the May election. The ND-Pasok majority coalition keeps the austerity programs largely intact, but with some significant tweaks to buy support from recession-weary voters.
2) Syriza wins, takes the 50-seat bonus and forms a coalition with like-minded smaller parties from the left, including the Democratic Left. This outcome triggers a confrontation with the EU and the IMF as Syriza tries to dilute significantly, but not scrap, the austerity programs, which the previous government promised in return for the second bailout. The coalition survives only because Syriza negotiates a compromise that could be called austerity-lite.
3) Syriza wins and vows to scrap the austerity programs no matter what. The EU and IMF withhold bailout loans and Greece, out of cash, defaults on its external debt. Chaos ensues as Greece has no choice but to leave the euro zone and reprint the drachma. This scenario appears increasingly unlikely as Syriza moderated its tone in the final days of the election.
4) The election is merely a repeat of the May election, that is, inconclusive. This would require a third election or rapid formation of a cross-party, unity government which could easily fall quickly.
Eric Reguly in Rome