This article originally appeared in Forbes.
It appears that Alexis Tsipras’s Syriza party has won the Greek election, although as of Sunday night, it remains unclear whether he will need to form a coalition government or be able to control parliament on his own.
Either way, it seems clear that the leftist Syriza party will be in control of Greek policy going forward. As a consequence of that, other questions now loom large for Greece. Syriza ran on a single issue: reversing Greece’s reforms, which had been the quid pro quo for the assistance Greece has received from the IMF, EC and ECB (known collectively as the “troika”) over the past several years. It is hard to see how Mr. Tsipras could change course dramatically and say that he is planning to honor Greece’s promises to the troika. Attention will now shift to the response of the troika to Syriza’s victory and its policy reversal.
Will the troika respond with a suspension of future assistance and a refusal to roll over existing subsidized debts? Judging from the statements of Mr. Draghi and European political leaders, it appears so. All current indications are that the troika will not accede to a reversal on Greek promises, which will mean an unavoidable Greek government default in a matter of two months. ECB refusal to roll over debt is also likely to produce a Greek banking crisis, as depositors recognize that the withdrawal of ECB assistance to Greece’s banks will mean that Greek banks will be unable to continue to operate at their current debt levels. In anticipation of the withdrawal of troika support, economic theory suggests that depositors should begin to run Greek banks preemptively. How much immediate pressure depositors bring to bear on Greek banks is hard to know.
Mr. Tsipras has said that he wants to stay in the euro zone, but if the troika refuses to continue sending money his way, then he is likely to have no choice but to suspend Greek banks’ convertibility into euros, default on Greek debt payments (more than three-quarters of which are owed to the troika), leave the euro zone to finance his deficits by printing a new domestic currency, and re-denominate bank deposits, loans and contractual wages into that new domestic currency (otherwise, mass insolvencies of borrowers, employers, and banks would result, as euro-denominated obligations will be much harder to fulfill). And if Greek depositors become sufficiently uneasy, Mr. Tsipras may not even have the chance to climb down from his pre-election rhetoric, even in the unlikely event that he comes to his senses; after all, once a run on the banks occurs, Greece could be forced out of the euro within a matter of hours rather than months.
Thus, the likely consequences for Greece of Sunday’s election are a chaotic future of bank runs, devaluation, capital flight, and even more worrying, new radical leftist policies to respond to the economic collapse produced by the crisis (e.g., huge expansions of government spending, and nationalizations). Nothing can be ruled out when someone like Mr. Tsipras is in charge – a European version of Hugo Chavez.
The immediate fallout for the rest of Europe from a Greek exit is likely to be minor, as Europe has had many years to prepare itself for this eventuality, and has done so through a variety of actions and precautions. The longer term consequences for Europe of a Greek exit would depend on how disastrous electing Tsipras turns out to be for Greece. If Greece finds itself engulfed in financial and economic chaos, that might lead voters in Spain and other struggling countries to think twice about copying Greece’s electoral outcome. And it may also lead Germany and other more stable countries to consider supporting aggressive policies to improve European growth prospects. Ultimately, therefore, although it is likely that Mr. Tsipras’s victory will soon be regarded as a major electoral error by Greeks, it could be a helpful wake up call for the rest of Europe.
Charles W. Calomiris is a member of the Shadow Open Market Committee and the Henry Kaufman Professor of Financial Institutions at Columbia University.
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