The judgment of Athens

But New Democracy vulnerable to the breath of streets

Deep in the recesses of ancient Greek myth, a young prince is given the choice of three beautiful goddesses. The three deities, Hera, Athena and Aphrodite, wish to know who is the fairest, and to that end they bribe the regent, and, in the versions of the myth greatly preferred by European artists, take all their clothes off. Aphrodite wins, but that is not the most significant effect of the contest. She wins because she offers a bribe that ends up causing the launch of a thousand ships, the fall of Troy, the birth of Rome, and the inception of Western civilization.

The elections yesterday in Greece may not end up sparking the same epoch-making chain of events as the Judgement of Paris, the name by which the mythical beauty parade is known. But in the febrile European climate of the past weeks, with Spain against a wall, Greece imploding and the Germans banging the drum of fiscal rectitude, the poll has taken on the veneer of just such a moment. For once, it seems, there is a simple choice between various trap-doors, each opening onto a vertiginous chute.

At the time of writing, early results pointed to a victory, by the smallest of margins, for the centre-right New Democracy party. The final composition of the parliament, and the incoming government, hinges almost entirely on which of the two leading parties comes first — thereby claiming a bonus allocation of 50 seats. The radical left Syriza would tear up the onerous conditions imposed by the European Union for Greece’s bailout; the apparent victor, New Democracy, would conform to the country’s bleeding cure, albeit with mild moaning.

The mood of panic surrounding this poll, which followed an indecisive Greek election in May, has seeped like a draught of poison across the entire European political and financial establishment. Until now, the response to the eurozone crisis since it began in early 2010 has been to muddle through in search of inter-governmental compromise: there has been endless summitry, novel compacts for good fiscal behaviour, innovative cash giveaways from the basements of the European Central Bank.

But last week’s agreement to pump 100 billion euros into the Spanish banking system swiftly terminated this modus operandi. It took less than a day of market activity to spot the frailties of yet another rescue package stuck haphazardly on top of a grave structural dilemma. The Spanish government and banks are locked together into a shared, mutually reinforcing debt crisis, while fiscal policies commended by the EU have sapped the last life out of the economy and, crucially, the housing market on which the banks’ balances depend. Far from assuaging the bond markets, the bailout sent Spain’s risk premium soaring to new, unsustainable highs.

Of course, it is quite possible that yesterday’s Greek election will not bring much clarity to this state of affairs. The results point to an inevitable coalition government, and possibly new elections. New Democracy’s resolve to stick with the bailout, reassuring as it may sound to the European elites, remains hugely vulnerable to the fiery breath of the Athenian streets and to a definitive run on local banks.

Even so, the election, just like the Judgment of Paris, has undeniably served a greater strategic purpose. For the first time, Europe has been ushered towards a fork in the path. In a series of ever tougher speeches last week, German Chancellor Angela Merkel planted herself, possibly irrevocably, in the camp of fiscal conservatism and against the recipes of shared euro debt promoted by the new French president, François Hollande. In so doing, she voiced the Calvinist common sense of northern Europe. “Everyone must mind their accounts and no one should live beyond their means,” she declared, rather aptly, to the Foundation of German Family-run Companies.

Her eye was on Greece, and on this week’s G-20 meeting in Mexico. The best model for such responsible behaviour is Latvia, whose “internal devaluation” in response to the contagion of Europe’s economic crisis, including a 30 percent wage cut across the public sector, lopped off a quarter of the country’s GDP before finally a tepid recovery began. Interesting, senior figures from the IMF and the European Central Bank recently descended on the Baltic minnow to praise its “courageous fiscal consolidation path” and “expansionary contraction.”

A radical alternative, which is more to the liking of the current Argentine government, can be witnessed in Iceland, whose ravenously transnational banking sector boomed to astonishing size before 2008, only to collapse in the wake of the Lehman Brothers’ demise. Instead of saving these banks, which was impossible for a country of Iceland’s size, it let them fall, devalued its currency, and imposed controls on purchases of foreign currency. Now, like Latvia, it has begun to recover.

But here is the nub of the problem. Slashing wages or snubbing foreign investors have certain restorative merits in small countries with their own currencies and stable export industries, such as these two. The eurozone’s heap of systemic vulnerabilities, on the other hand, is based on vicious circles of debt, austerity and recession in countries locked into a single payment plan.

Merkel, and her allies, are wedded to the notion of the euro as a club, whose ivy-covered walls house a group of efficient, productive lands punching hard in the global economy. Hollande and colleagues aspire to a fairer distribution of risks, largely by shifting future debt onto better-off countries. Both are impossible goals for the eurozone as it now stands, but neither plan countenances the panic that a euro break-up would entail. As for the goddesses of Zeus, the outcome will continue to depend on the weak judgment of Athens and lesser mortals.