Greece forms new government at last

Ending weeks of uncertainty across the continent, Greece has finally formed a government and Merkel has agreed the biggest bailout yet.

by Michael Northcott
Last Updated: 19 Aug 2013

Greece has finally elected and formed a government, after almost three days of wrangling to form a coalition. The cradle of democracy saw the pro-bailout New Democracy party take a narrow victory on Sunday, but without enough votes to form an overall majority in the country’s parliament. Now the party has joined forces with the Pasok (socialist) party and the much smaller, left-leaning Democratic party to form a government at long last. 

But there was no movement to speak of in stock markets following the announcement, despite share price buoyancy having reacted to every twist and turn thus far in the eurozone’s debt crisis saga. This could be because in a sense, nothing has really happened. Most people expect governments to come out of general elections, and Greece staying in the euro is only the least bad of a dire range of possible economic scenarios.

The picture looks to be improving elsewhere in the eurozone, too. At the G20 summit in Los Cabos, Mexico, Germany’s chancellor today effectively gave the OK for a gargantuan €750bn bond-buying facility to prop up Spain and Italy, whose economies are also groaning under the weight of their highly indebted banking sectors. Italy’s problem is that a lorry load of 10-year bonds are maturing this year, meaning the country needs to borrow around 28% of its own GDP just to pay the blighters back.

The bailout agreement will require governments across Europe to muck in and buy bonds in struggling governments, but the weight of this commitment will swing heavily towards Germany, as it is the euro’s biggest economy. This is the first time Germany has signalled that it willing to entertain such generosity to keep the euro afloat, but we reckon there will be a lot of deal-making across the EU over unified banking regulation, for example, before Germany will ever actually release that kind of money. Anyway, there are more hurdles to jump before Greece’s future starts to look stable again.

The new Greek government (which will be sworn in today and tomorrow) is planning to push for a renegotiation of the terms for its bailout repayments, and the level of austerity it is required to impose upon its public sector. Greece owes the IMF and EU a total of £220bn.

The formation of a new Greek government is definitely a much-needed step for eurozone stability. Let’s just hope that three-quarters-of-a-trillion euros is enough to get Spain and Italy back on their feet…

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