After Greek Election Results, How Much Longer Will Greece Stay in the Euro Zone?

The outcome of the general elections in Greece has not only left the country in political turmoil, it has also illustrated a massive rejection of austerity measures by the Greek people.

The mainstream parties — the left-winged Pasok and the New Democracy (right wing) — that have been ruling together since November 2011 were deserted for hard-line anti-austerity and anti-European policies political groups. This is a harbinger of an imminent exit of Greece from the euro zone.

The two have seen themselves heavily sanctioned, especially for their consent to apply austerity measures dictated by the European Union and the International Monetary Fund. They only represent about one third of the seats (32%) in the Parliament now, which means they do not have the majority needed (151 seats) to govern.

The Pasok and New Democracy parties could not count on a possible coalition, either, because most of the other parties represented in the parliament have ruled out any negotiations over the bailout plan.

The radical left Syriza Party — which now sits second in the new parliament — wants to renounce the European rescue plan. Indeed, its leader Alexis Tsipras wants a complete moratorium of payment of Greece debt interest, which is impossible to obtain.

The EU and the IMF have already granted two bailouts to Greece, and the condition to continue payments is subject to the rapid implementation of promised reforms and budget cuts. The European commission has warned Athens that it must keep its commitments and apply the reforms as part of its second plan reframing. But that cannot be done without a government that does not support such a plan.

Although the Greek constitution stipulates that the people should be called again to the polls if all the parties fail to agree on a coalition to form a government, given the new political landscape, it is unlikely that that Greeks will suddenly restore their confidence to the disavowed parties and go back to austerity.

In the meantime, the situation could lead to suspension of any further aid payments from the EU. In any case it could not continue funding a Greece where most people are hostile towards its policies.

But the country needs funding. If it fails to bring up a “pro-austerity” government in a short notice, it would not be able negotiate a new tranche of aid from the EU and the IMF. Even worse it could find itself cash-strapped as soon as the end of June. This means it would no longer its pay civil servants, pensions or other bills. In short, it would be bankruptcy and create social chaos.

Given the political deadlock, the only remaining alternative would be Greece removing itself from the euro zone, regain control of its monetary policy and face its debts, which amounts 251 billion euros, on its own.

When and how exactly this will happen is not known yet but it is becoming inevitable. Analysts from Citi Bank have said that there is now a probability of 50% to 75% that Greece exit the euro zone, and most likely by the end of 2012 or beginning of 2013.