Greece unlikely to leave euro in near term, says AllianceBernstein’s Darren Williams

Darren Williams, European economist, Global Economic Research at AllianceBernstein believes that the risks of a Greek exit from the single currency are further into the future.

Greece heading for another election?

It looks increasingly as if we may be headed towards another general election in Greece. New Democracy, the best placed party, gave up almost immediately on trying to form a government and that task now passes to the left wing Syriza party. It is highly unlikely that it will be able to succeed where ND failed and if no government can be formed from the current parliament then elections will probably be held again in June. Those elections would almost certainly be cast as a referendum on euro area membership, though this would by no means guarantee a better showing for the mainstream parties.

We think that Greece is unlikely to leave the euro in the near future. However, the risk of a possible exit is meaningful and it is hard to argue that it is any lower today than it was on Friday. The main reason for Greece remaining in the euro is that its euro area partners would be so concerned about the impact of an exit on other countries that they would (grudgingly) go to considerable lengths to avoid it.

Despite the election result, the vast majority (about 70%) of Greeks want to stay in the euro. The only problem is that they do not want the austerity that goes with it. Whether Greece’s euro area partners will be willing to reduce their demands on Greece by enough to address this contradiction is very much an open question. Comments yesterday from Germany, Brussels and even the new French President didn’t hint at much room for compromise here.

France-Vive L’ Evolution

During the campaign, Hollande has argued strongly that austerity alone will not end the sovereign-debt crisis and that there should be greater emphasis on policies that support growth and employment (including from the European Central Bank). However, this is apparent in his domestic agenda only to the extent that he plans a slightly slower pace of deficit reduction than his rival (i.e. a balanced budget in 2017 rather than 2016).

In truth, Hollande does not have much room for manoeuvre. Any attempt to repeat Francois Mitterrand’s (failed) dash for growth from the early 1980s is likely to result in ratings downgrades and rapidly rising bond yields. Indeed, this may a good thing as many aspects of Hollande’s programme represent a clear step in the wrong direction-this is particularly true of plans to lower the pension age and boost purchasing power through higher wages (a familiar French refrain, but one which would lead to a further deterioration in competitiveness vis-à-vis Germany).

Beyond these domestic considerations, markets are also interested in what an Hollande victory would mean for the euro area’s overall approach to the sovereign-debt crisis. According to some observers, Europe will finally have a “growth” champion willing to stand up to Germany and its beloved fiscal compact. I doubt this will be the case. Much of Hollande’s recent rhetoric should be seen in the context of the election. In my view, he is most unlikely to force a stand-off with Germany after Sunday’s vote.

Indeed, recent comments from Hollande and his advisors suggest that he does not object to the fiscal compact per se. Rather, he believes that it needs to be balanced by some form of growth initiative. There are strong parallels here with events that took place exactly 15 years ago. In 1997, French President Jacques Chirac called an early parliamentary election for tactical reasons and lost. The incoming Socialist government, led by Prime Minister Lionel Jospin, demanded a reappraisal of the recently agreed Stability and Growth Pact. The result was the introduction of a “counterweight” to the Stability Pact in the form of a new (though now long-forgotten) Resolution on Growth and Employment.

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