Expert opinion: Costas Milas on the Greek election result

Professor Costas Milas is Professor of Finance at the University’s Management School

“Brand new blocks of flats are designed and built with more than one emergency exits.  This never happened in the Euro bloc of 17 resident states which explains why Greece, a country with the tiny share of 2.5% of Eurozone’s output, can cause so many problems.  In any case, the result of Greece’s general elections is a “Pyrrhic victory” for those in favour of the Euro currency.  Indeed, with Greece in its fifth successive year of recession, there is very little to be cheerful about as the Euro has not been saved yet. 

“No clear parliamentary majority for any party means that Greeks, under pressure from the financial markets and their Eurozone partners, will have to work really hard together to form, as soon as possible, a stable and viable government which will restore confidence abroad and (re)negotiate successfully the ongoing austerity with the so-called “Troika” (representatives of the European Central Bank, the International Monetary Fund and the European Commission).  In their negotiations with Troika, Greeks need to flag the country’s dramatic recession.  In sharp contrast to the initial estimates of a 5% economic contraction and an unemployment rate of 19% for 2012, domestic output is already contracting by 6% in the first quarter of 2012, at the same time while unemployment is cruising towards 23%. Hence, it is unlikely that Greece will achieve a budget deficit target of 6.8% of GDP in the current year. Markets will not like this.

“Therefore, to avoid a new round of financial market uncertainty and a higher risk of economic contagion to the rest of Eurozone, Greeks need to re-negotiate austerity on a lengthier time-scale frame.  However, to achieve a slower fiscal adjustment path, Greeks need to give themselves something away.  That is, commit to a huge programme of privatisations and a radical restructuring of the excessively bureaucratic and inefficient Greek state which, according to our estimates, is responsible for up to 20% of the ongoing recession.  Indeed, government effectiveness indicators (published by the World Bank) point to very poor governance of the Greek state which is comparable to that in Argentina prior to its official default in the early 2000s.  Therefore, to avoid history repeating itself with huge repercussions for Eurozone’s stability, Greeks and Troika need to jointly work out a new viable fiscal path that will get a vote of confidence by the jumpy financial markets and save, yet once again, the Eurozone from an immediate collapse.”