IA S8-9 280512 Global opps_Eurozone crisis

If the rest of the currency union did not finance Greece, the effects of the resulting contagion would be profound.

Although the news has been full of warnings of Greece leaving the eurozone, this saga has been going on for more than two years, leaving many questioning what is different this time.

The significant change is that Greece has had an election without a clear winner. No party has been able to form a government but the voters sent a clear message to its parliament and the politicians in Brussels that the current policy of stringent austerity is unacceptable.

The party with the second largest number of seats is opposed to the terms of Greece’s bailout and particular its austerity measures, and if there is another election next month it is expected to be able to form a government.

If Greece did not then comply with the terms of the bailout it would not receive the funds which are necessary to repay its debts and keep the government functioning.

To coin a phrase, ‘It is different this time’. Greece has failed to implement many of the conditions necessary to qualify for the quarterly disbursements of funds from the bailout when the IMF and EU inspectors travel to Greece to check on their progress.

However, the difference is that there has been a government in power that has previously accepted those conditions and after fraught 11th hour negotiations has agreed to implement enough of them to satisfy the IMF/EU policy makers.

If a new radical government is elected it will have a mandate to oppose the terms of the bailout. In this scenario either the eurozone authorities will have to carry out their threat to force Greece out of the currency union or accede to the demands of the new government.

If it is the latter, the governing authorities will lose all credibility with regard to their ability to enforce discipline in the periphery countries.

Polls suggest that up to 70 per cent of Greeks would like to remain in the euro while a similar number voted for parties that were opposed to the terms of the bailout. In other words the Greeks want the best of both worlds.

The leader of the Syriza party has said that if Greece did not comply with the bailout conditions there is no way that the eurozone would force the country out of the currency union as it has too much to lose.

The only way that the Greeks can get what they want is if the eurozone authorities surrender to the demands of the Greek government. Given recent public pronouncements this is very unlikely although some small concessions, such as an extension of the period to implement the austerity measures, may be made. Therefore, it all comes down to a game of brinkmanship and who blinks first.