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3 Scenarios for the Greek Elections and the Euro

Greece faces its first parliamentary elections since the debt crisis erupted and are critical for the whole euro-zone.

The mainstream, pro-bailout parties will be hit, but how bad? Here are three possible outcomes and their meaning for the euro.

The previous elections resulted in a victory for the center left PASOK party led by George Papandreou. He revealed high debts, led his country through tough austerity and a first bailout, and was ousted after he suggested holding a referendum.

Papandreou was replaced by Lukas Papademos, an ex-ECB technocrat appointee who led a coalition government to the second bailout, which included a huge restructuring of debt. The terms of the bailout make it clear that bondholders have a priority to access the cash, and that more aid depends on more budget cuts for 2013 and probably for the near future.

The unemployment rate is 21%, but Greeks still prefer staying in the euro-zone. This is background for the May 6th elections. As many as 10 parties may enter the new parliament. In any likely outcome, a coalition government will be formed, and the negotiations could last for some time, leaving uncertainty high.

Mainstream Parties’ Weakness

Socialist PASOK will probably lose a lot of ground in these elections. Its leader, former finance minister Evangelos Venizelos is associated with the bailout and isn’t popular. PASOK could come out third in the elections, for the first time in history.

The main center right opposition party, New Democracy, is leading in the polls, but doesn’t seem to have an overwhelming majority. Despite being full members of the Papademos government, their leader Antonis Samaras has pledged to make some growth friendly changes in the current economic plans.

The EU doesn’t trust him at all, and forced him to sign a pledge to continue with the austerity programs that were prerequisites for the bailout.

Outside PASOK and ND, there is strong opposition to the austerity policy and the bailouts. This comes from both sides: from the communists to the seemingly fascist right, and everything in the middle, apart from the aforementioned parties.

What are the possible outcomes?

  1. The same coalition, with a different leader: New Democracy could lead a coalition government with PASOK and they will continue to push through the same policy. These mainstream parties are bitter rivals, and they could settle for another technocrat Prime Minister. This scenario is supported by the Greek election law, which has a minimum threshold of 3% to enter parliament. If many votes are lost on small parties that will be left out, the bigger parties will receive more seats than their actual votes. This outcome, especially if a technocrat PM is appointed, is what Brussels and Berlin are hoping for, and will be favorable for the euro.
  2. Center-right government: In this scenario, Samaras leads a government that includes the Independent Greeks, an anti-austerity right wing party led by a former ND member, and perhaps other parties. Such a government will create a lot of uncertainty: will it continue the current policy with minor changes? Or will it eventually blow up the whole deal? The negotiations towards such a government and its formation may hurt the euro.
  3. Anti-austerity government: According to some polls, the left-wing and right-wing parties opposing the bailouts might have a majority in parliament. However, being against austerity is probably insufficient for forming a government and bridging the gaps. Such a scenario would be possible if the more moderate anti-austerity parties such as the Democratic Left, SYRIZA and the Independent Greeks (right wing) take many seats and the more extreme parties take less or remain out of parliament. The probability is very low, yet negotiations on this option would be enough to create a big scare: such a government would take Greece out of the euro (which could be a good thing for the euro in the long run), with significant damage to European banks and making a euro-exit possible for other countries as well.

This article is part of the Forex Monthly Outlook for May. You can download it by joining the newsletter in the form below, which appears on any article on  Forex Crunch.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.