Why You Should Care About Greece Again

Greece is headed for yet another political crisis. The fallout will be a critical test case for the rest of Europe

Riot police carry shields past tourists outside the Parliament following a final vote by lawmakers for a new Greek president in Athens on Dec. 29, 2014

Kostas Tsironis/Bloomberg

Greece is headed for yet another political crisis. On Monday the Greek Parliament rejected the prime minister’s nominee for president, forcing the country into early general elections on Jan. 25. The fallout of this round of turmoil will be a critical sign of whether European leaders can hold on to power long enough to stay the course on the fiscal reforms needed to lift economies in the region. The upheaval comes just four years after the country accepted its first international bailout and almost single-handedly sent the global economy into a tailspin. 

Remind me why Greece freaked everyone out last time?

From 2010 to 2012 there was a general panic that countries deep in debt—such as Greece, Italy, Portugal, Spain, and Ireland—would be forced to default and leave the euro zone. Greece’s position was clearly the worst. It had the highest debt and the weakest economy. The fear was that Greece would default on its sovereign debt and stop using the euro as its currency, destroying people’s faith in the ability of other countries to pay their debts and creating a domino effect that could cripple global markets.

This led to massive strain in government bond markets and the financial system. Ultimately it was solved when, in the summer of 2012, European Central Bank President Mario Draghi announced a plan to provide a de facto sovereign backstop to government bond markets. Specifically, the ECB said it would buy government bonds as long as countries agreed to fiscal reforms. This quieted down the market significantly. 

And what’s happening now?

The latest twist is that former Greek Prime Minister George Papandreou is forming a new political party, which could have an impact on the coming elections. Recent polls have shown that the hard-left Syriza party has the best chance of winning control of Parliament, but that may change. Papandreou’s new group could steal enough votes from Syriza to ensure a victory for New Democracy, the center-right party currently in power, according to the Financial Times.

Syriza has earned popular support—and the skepticism of investors—in part by railing against the austerity measures imposed by the European Union’s $290 billion bailout, and threatening to stop foreign-debt payments.

So why isn’t everyone panicking?

People are calmer this time around for a few reasons, but the big one is that the current situation is less about debt sustainability and more about internal politics. If Greece were pushed out of the euro zone, it’s likely that other countries would be in OK shape, partly because the ECB is there as a backstop.

Do these elections matter at all?

Greece’s election could be a test case for what happens elsewhere politically. In Spain, you’re seeing the left-wing Podemos party surge in the polls. Should that party somehow gain power, then the euro zone would have a much bigger headache. You also see strong polling for nonestablishment parties in France and Italy, though things are a little more stable there. Still, the big issue is that the economy remains horrible across the euro zone. And until there’s a recovery, it’s going to be hard for establishment leaders to remain popular and powerful.

What’s the best-case scenario for the global economy?

Papandreou’s move is potentially good news for international creditors, especially if his new coalition can win as much as 5 percent of the vote later this month, as one recent poll cited in the Financial Times suggested, and poach supporters from Syriza. Lenders would almost certainly prefer the country to stick with New Democracy conservatives, who have dutifully carried out the austerity-for-bailouts program devised by the so-called Troika, which includes the European Commission, the ECB, and the International Monetary Fund.

“Investors have taken a second look at Syriza and understood that at this point in time it’s more radical than the traditional left in Greece,” Nicholas Veron, a fellow at the Bruegel research institute in Brussels, told Bloomberg. “If Syriza takes over, it won’t be a smooth ride.”

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