Greece saves Europe

How the anti-euro party lost the Greek election and won the future in Europe.

It only took 2200 years for Greece to give us something even more crippling than a Pyrrhic victory. That's a New Democracy victory. I know, I know. It's an ungainly phrase. But none the less apropos.

A quick recap. On Sunday, everybody's favorite past time returned. Greek democracy held world capitalism hostage -- or so the story went. The latest election pitted the mainstream conservative party New Democracy against the more radical leftist party Syriza. Nominally, New Democracy was the "pro-bailout" party and Syriza the "anti-bailout" party. The reality was a bit more complicated. Both wanted to stay in the euro. But both wanted to, ahem, renegotiate the so-called Memorandum that outlined the latest austerity agreement. New Democracy wanted to tinker at the margins. Syriza wanted to rip the whole thing up. Markets worried that Germany would kick Greece out of the euro -- setting off bank runs across the continent -- if Syriza won and tried to play hardball.

But Syriza didn't win the most votes. At least not this time. New Democracy grabbed the pole position, although not an outright majority. Still, New Democracy looks set to create a coalition government -- notwithstanding a bit of good, old-fashioned political intrigue involving the Greek Socialist party, Pasok. 

It's been a humbling year for the Socialists. Pasok and New Democracy used to form a de facto duopoly in Greek politics. No longer. Pasok's support has cratered recently. That's what happens when you're in charge during austerity. After getting the boot last year, Pasok came in a distant third during the latest election -- and said they wouldn't join any coalition unless Syriza did too. Their logic was simple. They didn't want to sign onto another doomed austerity project unless their rivals would take the political heat too. But it was just a gambit. Pasok quickly relented. 

So, Syriza wins. They get to watch the two big mainstream parties discredit themselves following Germany's austerity orders. And those orders won't get any easier. There had been rumors that Germany would ease up a bit if New Democracy won. Basically, give the Greeks two years instead of one to do the impossible. But nein. So New Democracy will be left with a Sisyphean task. And Syriza will be left exactly where it admittedly wants to be -- waiting to say "I told you so". It might be a long time before New Democracy wins another election.

But forget all that. The euro has been saved, right? Erm, not so much. Spanish and Italian borrowing costs are busy blowing up. In other words, Germany is throwing Greece to political extremists for nearly nothing. Now, to be fair, there's not much to recommend Pasok or New Democracy. On a good day, their extensive patronage networks are horribly inefficient. On a bad day, they'recorrupt. But lighting a fire to a country's political establishment isn't something that should be done lightly. You may not like what takes its place.

There are two nightmares for Europe. The first is that Syriza takes power in a few months and forces a Greek exit. Once it became clear that monetary union isn't irrevocable, depositors in weak countries would want to move their euros to strong countries. Bank runs would hit Spain and Italy overnight. It would take a huge dose of liquidity to put that financial fire out. As in, trillions of euros. But there's a second danger. It's that Syriza foreshadows future "anti-euro" parties in Spain or Italy. That too would be checkmate for the great European experiment. Those countries are too big and have too much leverage for Germany to bully. They are not, as the Spanish prime minister put it, Uganda.

Germany's strategy can be summed up in three words: kicking the can. That's prevented Armageddon so far -- but eventually you have to pick up the can. Greece shows that there's a political limit to how long you keep kicking. Once the political establishment goes, so do any assumptions you can make about the euro crisis.

Markets aren't fooled. Elections that ratify a toxic status quo just mean that the euro will fail over a longer time horizon. Eventually, you need solutions. Even in Europe.

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