By Vincent J. Truglia
My long-time readers know I am no fan of the Eurozone. In fact, I would argue it is the biggest economic and political mistake made within the advanced industrial world since the end of World War II. Nonetheless, many Eurocrats appear willing to sacrifice their own people’s well-being for a structurally flawed system, which can’t easily be fixed, even over the long-term.
Greek Presidential Elections
The Greek Prime Minister was forced to call for the election of a new President, since the present two-term President, Karolos Papoulias’ five year term ends in February 2015. Since almost everything in Greek politics is complicated, it is no surprise that the election of the president is equally so.
PM Samaras nominated a former EU Commissioner for the post. It probably wasn’t a good idea given how much antipathy there is within Greece towards the EU and all its institutions.
To win in the first or second round of elections, held within Parliament, a candidate must win 200 out of 300 seats. In the first round former EU Commissioner Stavros Dimas won just 160 votes. In the second round, he won only 168 votes.
The critical third-round requires only 180 votes. Yet, once again, Dimas got only 168 votes. If the third round doesn’t elect a new president, then snap-elections must be called for the entire parliament. New parliamentary elections have been scheduled for January 25.
After a new parliament is seated, electing a new president becomes much easier. A candidate only needs to win 180 votes in the first round, only 151 out of 300 in the second round, with the backstop being that in the third round, the contest is between the two top vote getters in the second round. Therefore, there is little doubt Greece will have a new President by the February deadline, unless of course a new government cannot be formed.
What’s The Problem?
The problem is that almost all opinion polls indicate the Syriza Party, a leftist party, looks likely to take over the next government. Although this is the only large Eurosceptic party on the far left, a win by Syriza will strengthen the hand of the mainly right-wing Eurosceptic parties rising across the EU (as witnessed in last June’s EU parliamentary elections).
Although Syriza has toned down some of its rhetoric in recent months, its main platform is a renegotiation of the Greek bailout by the Troika composed of the EU, the ECB and the IMF. A lot of money is at stake, since so far, the Troika has provided €240 billion in assistance to Greece.
The challenge Syriza poses for the Troika is that the IMF cannot write-down Greek debt. Theoretically, the ECB could write-down Greek debt, but this could cause significant negative reputation risk. These factors imply that the bulk of any Greek debt write-down would have to be Greek debt held by other governments.
This is complicated by the fact that Eurostat, the agency that oversees EU accounting practices, has the odd rule that a government doesn’t have to write-down debt (assets) if it simply extends the maturity and lowers the interest rate on those securities. Of course, this is a sham, since in net present value terms, such maturity extensions and lower interest rates, actually lower the value of the debt. However, Eurostat does require governments to write-down debt if there is any debt forgiveness. It’s a rather foolish approach, but that’s what it is. This will affect budgets across the Eurozone, which is manageable economically, but is problematic politically.
What Happens During A Showdown between the EU and Syriza?
In the near-term, there are enough tools in place to tide over the Eurozone if there is an EU-Greece showdown. However, the fundamental impact of such a showdown leads me back to my headline.
The risk is that we are seeing a reenactment of what happened in the US in the pre-Civil War era, or as they sometimes still prefer to call it in the Deep South, the War Between the States. Although there is no threat of a military confrontation, the same fundamental problem exists in the EU and the Eurozone, in particular, as compared to the pre-Civil War US, and that is battle over so-called states rights. In other words, which institution prevails, the individual nation or state, or the overall union? In the US, we lost over 500,000 people in settling that issue. My guess is that in Europe what we will see instead is an intensifying of opposition among member states against control from Brussels.
In the end, therefore, the political fall-out could be far worse than presently imagined, as more and more Eurosceptic parties gain in strength.
A Syriza victory will be a political game-changer.