haroldchorneyeconomist

This has  been a watershed day in Europe. With considerable pomp, much joy and great expectations François Hollande has begun his term as seventh Président of the fifth République following in the historic footsteps of Charles De Gaulle, Georges Pompidou, Valéry Giscard d’Estaing, François Mitterrand; Jacques Chirac; and Nicholas Sarkozy. His speeches today emphasized a new beginning, social justice, young people and being President of all of France despite the political differences that exist among French citizens as to the correct way forward in these difficult days. We wish him the very best in the demanding days ahead.

In Greece the political deadlock has continued and it seems that new elections will be announced tomorrow. If the polls are accurate and the political dynamic does not alter it would seem very likely that the anti-austerity party will gain further support and more seats in the next election. We shall see what the June election delivers. In the meantime uncertainty about the future of the euro in Greece will continue .

Just to put matters into a bit of perspective we should note that the GDP of Greece in 2011 was 217.8 billion Euros or roughly 283 billion U.S. $. The GDP of Alberta in 2011 was 286.6 billion C $ at current exchange rates  equal to $ 287.5 U.S. $. The GDP of Minnesota is 267 billion U.S. $ as of 2010. So while it is a major human interest story to see if Greece  and its 11.3 million people can be rescued from bankruptcy and prolonged misery we ought not to lose sight of the relatively small size of Greece in comparison to the German , French, American or Canadian economies.All of whom could come to the aid of Greece and prevent needless suffering by lifting the unrealistic and excessively severe austerity being imposed on them.

German GDP 2, 567 billion  Euros or 3337 billion U.S. dollars

French GDP   1,987.7 billion Euros or 2584 billion U.S. dollars

U.S. GDP 14,600 billion  U.S. dollars

Canadian GDP 1585 billion  U.S. dollars

Greek GDP 283 billion U.S. dollars.

The head of Pasok has been handed the mandate to hammer out an agreement to form a coalition government from itself with 13.4 % of the vote, New Democracy with 19 % of the vote and the social democratic party with 6 % of the vote. Together the three parties would have a narrow majority of the seats because New Democracy finished first and has an additional 50 seats on top of its proportionally obtained 58. This coalition would still be shaky because there are probably a number of parliamentary members in all three parties that would be nervous to be identified as politicians who sustained extreme austerity even when the majority of the electorate had rejected it. The Germans and the ECB and the Brussels technocrats would strongly support it but that might discredit it in the eyes of many citizens, unless they obtained some concessions to soften the pace and impact of austerity, something which so far Chancellor Merkel has adamantly refused to agree to.

There is a promising statement by an influential advisor to the German government on the need for greater flexibility in the demands made upon countries like Greece facing debt repayment crises.  This has been reported in the Athens English language press. See this excerpt below.

On the other hand, some polls taken since the election show that the austerity rejectionist party  Syriza, the  Coalition of the Left ,would gain aditional votes and seats and would finish first in a second round election potentially ending up with 128 seats in the new Parliament. Both Pasok led by Evangelos Veizelos and New Democracy led by Antonis Samaras would lose further votes and seats. So there is a big incentive for these two parties to strike a deal with the sixth party, Dimar. We shall see if the deal occurs and how the parties will present it to the Greek public, if in fact a deal is struck. It may work in the short term but I wonder how long it would take for it to unravel if unrelenting austerity is continued.

The poll conducted by Marc and reported in the Athens Press was conducted two days after the election and has the following result. Syriza 27.7 %  128 seats; New Democracy  20.3 %  57 seats; Pasok  12.6% 36 seats; Independent Greeks 10.2 % 29 seats; KKE 7 % 20 seats; Golden Dawn 5.7 % 16 seats; Democratic Left 4.9 %  14 seats.

The latest news on Friday late afternoon suggests that the small social democratic party Dimar is refusing to enter a coalition without the participation of Syriza who was elected on the basis of its opposition to austerity. A new election is looking more likely unless all four of these parties, Pasok, New Democracy, Dimar and Syriza compromise somewhat. There is another alternative but it would require some compromise on the part of the European leadership.(See Peter Bofinger’s statement above) This would involve some softening and some temporary suspension of the draconian austerity being imposed foolishly on Greece. With a better set of rules and more time both political and economic recovery would become possible.There are probably at least five political parties in Greece who would seek to participate in a government that had been offered these better terms. As of Friday evening the talks had reached an impasse which the President will seek to overcome tomorrow.

The negative initial reaction to the election in France of François Hollande and the repudiation of austerity in Greece was not unexpected. Nevertheless it is irrational and by the end of the day stocks seem to be recovering although the Euro was trading at a lower exchange rate. The lower exchange rate for the euro would be a good thing as it would help spur European exports and attract both tourism from outside the euro zone and inward investment. Plus Hollande’s emphasis upon growing the economy and ending austerity is good for business and hence for stock prices. Higher aggregate demand means greater sales and more profits and lower unemployment and stronger growth. The Greek situation is more complex but also can be improved rapidly by suspending the excessive and unnecessary austerity being imposed there and seeking a coalition of parties who can agree on the way forward. An optimistic wind is blowing in Europe and it would be smart to set one’s sails to it.