Time to parley.

Photographer: LOUISA GOULIAMAKI/AFP/Getty Images

Greek Growth Drought Is Real Threat to EU

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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So Greece has elected a new anti-austerity government and, as of this writing at least, the nation remains in the euro, financial markets are calm, and the world continues to revolve around the sun. Now comes the hard part.

The Syriza party's rise to power on pledges to halt spending cuts and renegotiate Greece's debt burden doesn't necessarily spell the disaster that scaremongering claimed it would. To control sufficient seats to form a government, Prime Minister-elect  Alexis Tsipras is teaming up with the Independent Greeks, whose lawmakers are vehemently in favor of a debt write-down. He's entitled to build a coalition that reflects the electorate's appetite for change; but he'll still need to parley carefully with the nation's paymasters at the European Union, the International Monetary Fund and the European Central Bank.

Greece's Fiscal Odyssey

The task facing the currency union's leaders is to prevent the economic discomfort evident in the Greek election outcome from metastasizing. “Europe needs to seize the opportunity provided by Greece to make a wider change in its policies," Thomas Piketty, the French economist and author of the bestselling "Capital in the Twenty-First Century" told France Inter radio this morning, and he's right.

ECB President Mario Draghi took an enormous gamble with last week's plan to introduce quantitative easing, buying more than 1 trillion euros ($1.12 trillion) of bonds to boost his balance sheet and funnel more cash into the economy. His efforts become even more of a crapshoot without a corresponding initiative from euro governments to do more to avoid slumping back into recession.

It would be unwise to allow even the appearance that the bloc's weakest and most fractious member is setting economic policy for the entire collective -- even if the new direction it chooses is the correct one. So the leaders of monetary union should seize the initiative first and change course for the bloc themselves, citing the deteriorating outlook for growth and inflation.

The post-crisis pursuit of economic discipline needs to be softened to acknowledge the need to do more to boost growth, and not just because that's what voters elsewhere, notably Spain, are likely to demand. The EU needs to publicly acknowledge a change of tack; which means German acquiescence to a more fiscally relaxed future.

Greece will need some special treatment to keep its economy afloat; more than 4 billion euros left the country's banking system this month, adding to December's 3 billion euros of withdrawals and leaving about 157 billion euros on deposit. A run on the banks is a clear and present danger. National debts of more than 170 percent of gross domestic product are clearly unsustainable; if Greece's official lenders can't stomach a write-off, then at least lengthening the repayment periods and reducing interest rates would give Tsipras a victory with which to appease his supporters.

But it's the underlying state of the euro region's economy, not the twitching of the Greek electorate, which should motivate EU leaders to recalibrate their policies. Data later this week will probably show that consumer prices dived by 0.5 percent this month, extending December's 0.2 percent slump. With Draghi sufficiently concerned about the outlook to corral his fellow policymakers into agreeing to buy 60 billion euros of bonds a month for the foreseeable future, politicians need to do their bit. Otherwise, as the Greek election shows, they may find themselves out of a job -- and rightly so. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Marc Champion at mchampion7@bloomberg.net