Business Insider: Greek elections may damage euro
NEW YORK, NY: Traders work on the floor of the New York Stock Exchange on June 18, 2012 in New York City. After early gains in world markets due to the Greek voters rejecting the leftist anti austerity party, the Dow Jones industrial average fell 52 points, or 0.4%. in morning trading.
Morgan Stanley senior European economist Daniele Antonucci writes in a note today that while the results of Sunday's Greek election may provide temporary relief, internal politics will weigh on external politics in Greece over the medium term.
The close race between the "pro-EU" and the "anti-bailout" parties showed that Greek voters are both afraid of the economic consequences of a Greek exit from the euro, and opposed to the crushing austerity measures that comprise the terms of the current Greek rescue plan.
Antonucci thinks the anger in Greece could trump the fear eventually, and this may constitute some permanent damage to the euro:
The cost of austerity is a deep recession. This affects the domestic population, which has a say in the political process. The cost of pursuing other policies, from attempting to renegotiate the terms of the adjustment programme to defaulting or even asking the question of eurozone membership, has an impact on the creditors (and the future borrowing costs), which are mainly outside of Greece. They don’t vote.
What’s the key trade-off: In essence, a country would choose to, say, default on its domestic debt, instead of enduring a painful domestic adjustment, if the cost of the latter exceeds the cost of the former. The same applies to milder (renegotiation of the terms) or harsher (attempting an exit) options. Basically, if a large share of government debt is held by foreigners (as is the case for Greece), a default might seem more palatable, as the cost on the domestic population would be smaller. So while the ‘Drachmageddon’ might have been avoided for now, there’s still a latent risk that it might happen in the future. Because of this latent risk, some damage to the Euro, we think, might even be permanent.
More from our partners at Business Insider:
Business Insider: The 22-Year-Old Who Won A Seat In The French Parliament Looks Very Familiar
Business Insider: Merkel Won't Budge, Spain and Italy Get Destroyed
Business Insider An Unsanctioned Journey Into The Heart Of Iran
Business Insider: Trade War: How 12 Major Economies Have Closed Up Since The Crisis
Business Insider: These Are The 15 Most Peaceful Nations In The World