After Greek elections eased fears that the country’s exit from the euro zone was imminent, attention turned Monday to an even bigger challenge: restoring the economic body to health with Greece still in it.
A respite from market pressure early Monday proved to be short-lived, as investors shifted their attention from political infighting in Athens to the larger question of whether European leaders could find a more lasting solution to a debacle now well into its third year.
But even though Brussels had been hoping for the victory by Antonis Samaras and his center-right New Democracy Party, the yearned-for result, paradoxically, may weaken Europe’s determination to take more radical steps to avert a meltdown.
German hard-liners were emboldened by the victory, viewing it as an endorsement of the drive for structural adjustment in Greece and elsewhere in Southern Europe through further austerity. As a result, the vote may delay concerted pro-growth steps by central banks and governments around the world, as well as the hard choices within Europe over deeper integration that are likely to prove necessary in the long run.
There was no end in sight for the endless wrangling that continues to inhibit the recovery that the sluggish global economy so desperately needs. Borrowing costs remained painfully high for Italy and unsustainably high for Spain.
“We are still in a crisis of confidence,” said Harald Benink, a professor of banking and finance at Tilburg University in the Netherlands. “Quite a few of the fundamental issues have not been resolved.”
President Obama on Monday echoed the sigh of temporary relief coming from global leaders over the outcome of Greece’s elections, and couched his words with what seemed a veiled appeal to Germany to ease up on its austerity-first demand for how Greece should handle its fiscal crisis.
“I think the election in Greece yesterday indicates a positive prospect for not only them forming a government, but also them working constructively with their international partners in order that they can continue on the path of reform and to do so in a way that also offers the prospects for the Greek people to succeed and prosper,” Mr. Obama said on Monday as an economic summit meeting of world leaders in Mexico was getting under way.
But Chancellor Angela Merkel of Germany adopted a tough stance with regard to Greece, reflecting a stay-the-course attitude popular among voters at home.
“The Greek government will and must naturally follow through on the commitments that were made,” Ms. Merkel told reporters at the Group of 20 meeting in Los Cabos, Mexico, disappointing those in Athens who hoped for a signal of new flexibility toward Greece in the wake of the vote. “There can be no loosening of the reform steps.”
A victory in Greece by the leftist upstart party Syriza —whose leader,Alexis Tsipras, promised if elected to tear up the agreement with the so-called troika of the European Union, the European Central Bank and the International Monetary Fund — might have precipitated a confrontation ending with Greece leaving the euro zone.
But financial markets rose last week after hints that central banks around the world were preparing to head off the expected turmoil by pumping cash into banks. A Greek departure and the ensuing contagion and speculation might have forced leaders to either give up on the euro or circle their wagons and defend it ferociously.
Instead the narrow victory for the pro-bailout forces in Greece restored an unhappy status quo, a situation dominated by bickering and uncertainty, one that was slowly bleeding the global economy of forward momentum. “The risk is that this benign outcome could inhibit a bolder solution at the upcoming E.U. summit,” Rainer Guntermann, a Commerzbank analyst, wrote in a note to clients Monday.
As heads of the 27 European Union governments prepare for that summit meeting next week, they contemplate a growing list of problems. They must keep Greece on life support, rescue Spanish banks and prevent the crisis from infecting Italy. At the same time, they are embarking on a contentious and potentially drawn-out struggle to re-engineer a euro currency union whose weaknesses have allowed all these problems to accumulate.
Ms. Merkel has seemed increasingly isolated in recent months, especially following the defeat of her partner in dealing with the turmoil in Europe, former President Nicolas Sarkozy of France. The new president, François Hollande, won a majority in Parliament on Sunday, which is likely only to embolden his drive for more growth-oriented spending and a retreat from German-style austerity.
Ms. Merkel has called for deeper fiscal and political integration to improve the functioning of the currency union. While leaders in Paris, Rome and elsewhere would like to tap Germany’s top credit rating through jointly issued debt, they are not as ready to give up more powers to central authorities in Brussels.
Although there is widespread agreement that the existing plan for Greece has put a nearly intolerable burden on its citizens, the only way to give the country more time to fix its economy is to lend it more money. And that would not be popular in Germany and other countries in Northern Europe, where the widespread perception is that Greece is not worthy of more credit because it has made scant progress on deregulating its labor markets, removing barriers to competition and getting citizens to pay taxes.
“From an atmospheric point of view there’s an improvement, but otherwise nothing has changed,” said Manfred J. M. Neumann, a professor at the Institute for International Economics at the University of Bonn. “We want the Greeks really to do something now with respect to reform,” he said. “They haven’t opened up their taxi business. They haven’t liberalized their markets. They always say, yes, yes they do, and then they don’t.”
The longer the program runs, however, the more money Greece will need; in a report Monday, the Eurasia Group estimated the additional financing gap at roughly $25 billion to $38 billion.
Signals from Brussels and other European capitals on Monday were that there might be some leeway to ease the terms of aid to Greece. “The negotiated conditions must be adhered to, but one should also give the Greek population air to breathe,” said Werner Faymann, Austria’s chancellor, citing ensured access to medical supplies, which has been parly disrupted, as one example of a way to ease suffering. “The consolidation must not exclusively be carried out on the back of the population.”
Behind the scenes, Group of 20 leaders are putting together what they are calling an “action plan” for Europe aimed at reducing unemployment by delaying some austerity cuts, investing in public works and overhauling labor markets. But few analysts expect any kind of magic bullet to emerge from the summit meeting.
And even as they professed support for more pro-growth policies, European leaders sought to deflect attention away from their own crisis onto the economic woes of other countries. “The impact of our current problems has to be relativized,” Herman Van Rompuy, the European Council president, said at a news conference in Los Cabos.
“The European Union “is correcting its internal imbalances,” he said. “We expect that other G-20 members correct their external imbalances as well.” Mr. Van Rompuy also warned investors not to expect any hard decisions to be made at the European Union summit meeting next week.
Instead, he vowed, as European officials have frequently done in the past, to set out a road map for future solutions. “Even if we in June will not take definitive decisions,” Mr. Van Rompuy said, “the path and trajectory are very clear for everybody.”
To most analysts, however, the trajectory was far from clear. Despite the pressure from Mr. Obama and many economists both inside and outside Europe, Ms. Merkel is holding the line because bending on Greece would be immediately followed by demands from Portugal and Spain, her supporters said. “The whole south will try to get more resources; this has to be stopped now,” Mr. Neumann said. “She wants to give them the signal: Now you have to do something yourself.”