Days after Spain received an underwhelming bailout package (see: failout), Spanish government bonds reached a yield of 7%, reflecting the downgrade of the Spanish government and sinking expectations in the euro zone. The bailout package failed to convince markets that the future of the euro zone is assured, and does little to alleviate the feeling of impending doom in the euro zone. The Spanish deal was essentially contingency-free, and recapitalized Spanish banks – as opposed to the Greek bailout package, which forced austerity measures on the country and facilitated a debt exchange with credit holders.
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Some Greek politicians are using the outcome of the Spanish bailout package to take a tougher line in negotiations with the Eurogroup. Greek hard-lining is happening against a backdrop of upcoming government and parliamentary elections occurring Sunday. Austerity reforms will not work unless the citizens agree to implement and live by them – a diet that has been hard to swallow for the Greek people. The outcome of the election could be the turning point for the beginning of another global recession.
A stronger political union – what many agree is the best way for the euro zone to move forward – is politically unpopular among European citizens. This makes it difficult for European politicians to implement needed reforms, as they seek re-election in often-unstable parliamentary systems. Prime Minister Jean-Claude Juncker of Luxembourg, the chairman of euro zone finance ministers, explained, “We all know what needs to be done, but we don’t know how to get elected after that.” The result is paralyzed European governments that fight for the interests of their constituents rather than focus on the future of the euro.
Signs in Greece seem to point to the election of an anti-austerity party, such as Syriza. Capital flight is already occurring in Greece at a staggering rate – estimates put withdrawals between €600 million euros ($750 million) and €900 million per day. If Syriza is able to form a government, and rejects overtures from the European Central Bank to adopt pro-Europe reforms, Greece may very well leave the euro zone. In the worst-case scenario, with a Greek exit from the EU, money begins to leave European and American markets at a staggering rate. Strategists at Merrill Lynch have provided a cheat sheet of scenarios for the Greek election results; here’s what they have to say about a Grexit:
“The strategists see the 10-year Treasury yield at 1.3%, sliding U.S. and European stocks, the euro at 1.20 and deflationary pressures compressing gold and oil prices.”
This, of course, would spell trouble for incumbent Barack Obama. The economy is Issue #1 for most American voters, particularly middle- and lower-class workers who haven’t seen much relief during the recovery. President Obama has been making the case that he has, in fact, made things better, but is facing a tough audience. Recently, the campaign shifted tactics as the president focused instead on underlining how much worse the economy would be under a President Romney, and that he needs four more years to show people the results.
Will Americans give Obama another chance, particularly given the very real possibility that we are sliding into another global recession? It depends on how well the president can charm donors and voters who voted for him in 2008 but are now skeptical. With the latest polls showing Romney and Obama neck and neck, the battle for the white house (capitalize White House) will be drawn-out and difficult.
But there is only so much the incumbent president can do to control circumstances surrounding the election. European parliamentary elections could play a much bigger role in the global economy than ever before. Ultimately, the Greek elections this week will send a message to the world: one that will reverberate until November.