Early elections were held in Greece on May 6, but the results have left the birthplace of democracy without a government. The leading liberal New Democracy party got just 19 percent of the vote and 108 seats in the 300-member Greek parliament. Their main opponents for the last 40 years, the socialist PASOK party, finished third with 13 percent and 41 seats. This means that the two parties cannot even form a “grand coalition” government without the support of some third party. The big winner of the elections was the neocommunist SYRIZA party, which finished second with 17 percent and 52 seats. Other parties in the parliament include the populist Independent Greeks (33 seats), the old-communist KKE (26 seats), the social-democratic Democratic Left (19 seats) and the neo-Nazi Golden Dawn (21 seats).
How did the Greek elections end up in such a mess?
Since 1981, PASOK has been dominating the Greek political scene. Under the leadership of the flamboyant demagogue Andreas Papandreou and his political descendants (including his son George) it governed alone for 22 out of the last 31 years. New Democracy governed for the other nine years, but did little to reverse any of PASOK’s socialist policies. Despite membership in the European Community, the socialists expanded the public sector, and that meant tripling the public debt from 34 percent of GDP in 1981 to 113 percent in 2008.
Nonetheless, Greece was admitted to the eurozone in 2001, having cleverly misreported the official economic statistics. Since 2001 the Greek government has paid Goldman Sachs and other banks hundreds of millions of dollars in fees for arranging transactions that hid the actual level of borrowing. Why did Germany, which leads the eurozone, turn a blind eye to this behavior? Because she valued the strategic position of Greece, and believed that the problem would not get out of control.
But the problem did get out of control in 2009 as a result of the global financial crisis. Greece’s budget deficit climbed to 15.6 percent, and the public debt reached 129 percent, figures higher than those of any other European country. The liberal Prime Minister Kostas Karamanlis, realizing that worse was yet to come, held early elections and surrendered the government to the American-born socialist George Papandreou. Papandreou did not take any measures to control the crisis, and the country went hat in hand to the International Monetary Fund in May 2010 for a bailout package to avoid default.
The measures imposed by the IMF were focused on uniform salary cuts and more taxes, including a very unpopular home property tax. No privatization was implemented, and no civil servant was laid off, while 600,000 people lost their jobs in the private sector. Unemployment hit 21 percent in December 2011, while youth unemployment is an unimaginable 51.1 percent. The country is suffering a “brain drain” as more and more young and educated people leave for other European countries.
In November 2011, PASOK and New Democracy formed a coalition government under the banker Lucas Papademos. The government approved a second bailout package, which included more salary cuts and a “haircut” of 53.5 percent for private holders of government bonds. Antonis Samaras, leader of New Democracy, forced early elections, expecting to win an absolute majority and form a new government alone.
But his plan backfired, as the electoral period was very short (two weeks), and the public vented its anger on the ballot. Not only can a new “grand coalition” not be formed, but there is no other party willing to take part in the government, as left- and right-wing extremists dominate the other parties. As of this writing, new elections are scheduled for June 17, but no one can guarantee that a stable pro-eurozone government will be formed after them.
Economists have coined a new term to describe the possibility of Greece leaving the euro: Grexit. Unfortunately, the impact of a Grexit on Greece, the eurozone, and the world economy may be far greater than the initial financial problem.