Europe

Greece Nears a Coalition That Seeks Space to Fix the Economy


Leader of the New Democracy conservatives, Antonis Samaras (R) smiles after the meeting with socialist party leader, Evangelos Venizelos at the Greek Parliament in Athens.

Photograph by Louisa Gouliamaki/AFP/Getty Images

Leader of the New Democracy conservatives, Antonis Samaras (R) smiles after the meeting with socialist party leader, Evangelos Venizelos at the Greek Parliament in Athens.

Three parties were poised on Tuesday to form only Greece’s third coalition government in the past four decades. Conservative New Democracy, which won the June 17 elections, Socialist Pasok, and pro-euro Democratic Left were close to agreeing on a deal to create a government that would hold 179 of the 300 seats in Parliament.

Overcoming Greece’s traditional contempt for consensus politics is just the first task for New Democracy leader and would-be Prime Minister Antonis Samaras, Pasok chief Evangelos Venizelos, and Democratic Left President Fotis Kouvelis. The three politicians also have to agree on a common negotiating line to follow in discussions with euro zone leaders.

Greece is hoping to convince its euro partners that the terms of its current bailout must be changed. The economy is on course for a contraction of more than 5 percent of GDP this year. Two months of uncertainty due to the May 6 and June 17 elections have led to the public administration coming to a virtual standstill. The euro zone and International Monetary Fund had wanted Greece to announce this month more than €11 billion of savings for 2013 and 2014. The new government will argue this is not possible and that the period for it to complete its fiscal adjustment should be extended by at least two years, to 2016.

German Chancellor Angela Merkel has insisted that Greece cannot waver from the course of broad structural reforms it agreed on with its lenders, but there were indications on Tuesday that the Europeans are flexible on the fiscal targets in the bailout agreement, or memorandum of understanding (MOU). “Anybody who would say that we need not, and cannot, renegotiate the MOU is delusional,” an EU official told reporters. The head of the Eurogroup of finance ministers, Jean-Claude Juncker, said the “timeframe” of the agreements could change, but not their “substance.”

These comments are encouraging for the new government. If the first thing it had to do was set out billions of euros of savings, including pension cuts, the little domestic goodwill it could call on would vanish in an instant. Also, the leftist opposition party, Syriza, would be handed an immediate platform to begin its assault on the new administration.

The best the new government can hope for is that the euro zone allows it to ease up on austerity so it can establish a semblance of stability at home, where Greeks have seen incomes plunge and unemployment soar during the past two years. In a more stable environment, the coalition could conduct some of the structural reforms that have broad public support, such as increasing the efficiency of its civil service, improving tax collection, and speeding up the justice system. Enacting these reforms would help create the feeling that after numerous broken promises, something is changing for the better.

The combination of less austerity and more reforms might help the coalition buy time at home and abroad. It is perhaps the only chance this unity government has of retaining power for longer than the other two coalitions Greece has had since 1970. Each of those lasted just five months.

Malkoutzis is a Bloomberg Businessweek contributor.

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