Greece’s flirtation with an exit from the euro in 2011 and two cliffhanger elections in 2012 prompted the darkest days of the debt crisis, halted only by the European Central Bank’s pledge to save the currency come what may.
Now, with the collapse of another Greek government, Europe’s leaders, its more vulnerable economies and financial markets are better prepared. While euro in-or-out threats will echo through the Greek election campaign, the spillover across Europe this time is likely to be contained.
“We’re looking at a Greece problem -- the euro crisis is over,” Holger Schmieding, chief economist at Berenberg Bank in London, said by phone. “The euro crisis was all about contagion risk. I do not expect markets to seriously contest the contagion defenses of Europe.”
Investor reaction to the Greek parliament’s failure to pick a president traced the familiar north-south divide. Greek stocks and bonds plunged and markets were buffeted in Italy, Portugal and Spain, while funds flowed into Germany, Europe’s biggest economy and hard-money bastion.
Yet look closer and Italy, the euro zone’s second most-indebted country after Greece, is nowhere near a fiscal calamity. Ten-year borrowing costs are hovering around 2 percent, compared to over 7 percent at the height of the crisis, and today Italy auctioned 10-year government bonds to yield less than 2 percent for the first time on record.
Countries along Europe’s edges are better equipped now, thanks partly to the ECB’s likely start of sovereign bond purchases, said analysts at JPMorgan Chase & Co. led by David Mackie. Especially Spain and Ireland have turned the corner economically, they said.
“Distress in Greek financial markets has historically impacted negatively other markets, but we are inclined to downplay the medium-term significance of the Greek political crisis” for bonds elsewhere in Europe, the analysts said in a note to clients.
Greece leant over the precipice yesterday when Prime Minister Antonis Samaras fell short of a parliamentary supermajority to elect his candidate for the country’s largely ceremonial presidency. That forced a new parliamentary election next month pitting Samaras, who came to power in 2012 after initially challenging the terms for Greece’s 240 billion-euro ($293 billion) rescue package, against Alexis Tsipras of the Syriza party, who never stopped challenging them.
There were echoes of 2012 in Europe’s political reaction. Back then, German Finance Minister Wolfgang Schaeuble said “we cannot force Greece” to press on with the budget cuts needed to stay in the euro zone, while a German then on the ECB board, Joerg Asmussen, said there was “no alternative” to austerity.
Schaeuble reprised that line in a statement yesterday, saying that tough reforms in Greece were bearing fruit and “they are without any alternative.” Germany will support Greece on its path of reform, he said, though “if Greece chooses a different way, it will become difficult.”
The European Commission put the choice before Greek voters in more upbeat terms. What Greece needs to keep aid flowing is “broad support” in the election for a “growth-friendly reform process,” Economic Commissioner Pierre Moscovici said in a statement in Brussels.
When Greece hurtled toward bankruptcy in early 2010, the European Union had no way of helping countries in need. When Greece toyed with quitting the euro in late 2011, and held a stalemated election in May 2012 before Samaras put together a unity government after a second election six weeks later, it had only a temporary bailout fund.
Now, it has a full-time aid fund in the 500 billion-euro European Stability Mechanism and a central bank tiptoeing -- amid opposition from Germany -- toward large-scale bond purchases. It also boasts success stories: Ireland, Portugal and Spain have been weaned off financial aid.
The risk is less a splintering of the 18-nation euro zone - - it will become 19 on Jan. 1 when Lithuania joins -- than a protracted phase of subpar economic growth that leaves a generation scarred by unemployment and tempted by political extremism, especially in the south.
“Europe remains stagnant,” Italian Prime Minister Matteo Renzi told reporters in Rome. “Reforms alone aren’t enough. The EU paradigm needs to change.”
As at earlier moments of stress for the euro, the focus is on the ECB as the European institution that can act the quickest to buttress the economy. Greece’s campaign and talks over a bailout extension will at most delay ECB moves to buy sovereign bonds, said Mujtaba Rahman, a former EU official who is now director of European analysis at the Eurasia Group in London.
“Monetary policy decisions will be influenced by developments in Greece only to a very limited extent, given the small size of the Greek economy,” Rahman said in a research note. “But the coming few months will be volatile, and with it the risk of unintended accidents.”