Composition of Greek Government Doesn’t Really Matter
November 3, 2011 1 Comment
Today has been a whirlwind of rumours coming out of Greece. One thing seems clear: a referendum is off the table now. What remains unclear is what will happen to the government. Ultimately, it doesn’t really matter what the composition of the Greek government is.
While prime minister Papandreou favoured forming a coalition of national unity earlier today, the main opposition leader Antonis Samaras has said this is not an option. Instead, Mr Samaras is demanding the prime minister resign and an interim government be installed until elections can be held in 4-6 weeks. There are rumours Mr Papandreou has agreed to step down if New Democracy supports him in the vote of confidence in parliament tomorrow, but these rumours are unconfirmed. There are also rumours that Lucas Papademos, a former ECB vice president, has been tapped to lead an interim government. Mr Papademos was asked to fill the role of finance minister last June when prime minister Papandreou reshuffled his cabinet and resolutely turned the role down, presumably because he considered taking the role akin to political suicide. I remain unconvinced that he will agree to lead an interim government that is tasked with implementing the terms of a bailout programme that is doomed to fail.
The composition of the Greek government is not that important. The Greek government is not really in charge of fiscal policy anyhow; Greece has largely ceded its sovereignty to the troika, which will be setting up shop in Athens going forward. It is only crucial that any government in place is willing to approve the second bailout package so Greece can receive its next tranche of funding before €8bn in debt comes due in December, thereby avoiding a disorderly default. Mr Samaras has said that his New Democracy party will vote in favour of the second bailout, but that he aims to renegotiate the fiscal policy delineated in it. I expect Mr Samaras would be told in no uncertain terms by the troika that a bailout renegotiation is off the table (just as Enda Kenny was earlier this year).
Even if the Greek government passes and implements the second bailout package, however, the endgame for Greece is unlikely to change. Greece can either undergo a decade of recession/depression to regain competitiveness or it can exit the eurozone and reissue the drachma. The latter option would be painful, but would allow Greece to regain competitiveness almost overnight and return to growth in a matter of months. Ultimately, I think this is the option that any Greek government—whatever its composition—will choose.