More than five years into the eurozone crisis, Greece is at the center of attention once again. On Dec. 29, the Greek government announced that it will conduct early elections Jan. 25. The decision came after the parliament in Athens failed to appoint a new president. According to the Greek constitution, the parliament has to be dissolved if lawmakers fail to elect a president. This opens a new period of political and financial uncertainty that could ripple across the eurozone.
Greece is currently ruled by a grand coalition of the country's traditional mainstream parties — Prime Minister Antonis Samaras' center-right New Democracy and center-left Panhellenic Socialist Movement, or PASOK. The formation of this coalition was an unprecedented event in modern Greek politics. It was the result of two inconclusive elections in 2012 that forced Greece's traditional rivals to form an alliance to remain in power. The economic crisis led to a significant decline in the popularity of Greece's main parties, which ended the traditional supremacy of New Democracy and PASOK and introduced new players, most notably the left-wing Syriza party and the neo-nazi Golden Dawn.
Recent opinion polls say that Syriza could win the upcoming elections with around 28 percent of the vote, with New Democracy receiving roughly 25 percent. However, it is not clear whether this would be enough for Syriza to form a government. In the present context no party would be able to form a government on its own, requiring the forging of alliances as a result.
Greece's economic reforms will be at the core of the political debate in the coming weeks. New Democracy will campaign on a platform of softer reforms for 2015 and the promise of a fast exit from the country's financial assistance programs. Syriza, on the contrary, will promise to reverse some of the painful reforms that Athens applied under pressure from the European Union and the International Monetary Fund. More important, Syriza will propose a renegotiation of Greece's massive foreign debt.
Regardless of who wins the elections, the next Greek government will have to appoint a president, negotiate an exit from the current aid programs and fill Greece's funding gap for the upcoming year — all measures that will be extremely controversial. In addition, any new government will probably slow or even reverse the ongoing process of economic reform, something that makes EU officials increasingly nervous.
In recent weeks, Syriza sought to reassure financial markets and the European Union by promising not to introduce any unilateral measures. The party said that, if elected, it would keep Greece in the eurozone and negotiate Greece's debt with Brussels. However, markets are worried about a victory by Syriza, and Greece's debt yields have risen in recent weeks. Greece's debt renegotiation in 2012 put most of its arrears in the hands of EU institutions and the European Central Bank. As a result, the European Union is unlikely to accept a new restructuring of Greece's debt. However, Brussels is likely to accept measures such as extending the maturity of Greece's debt and lowering interest rates, although only in exchange for additional reforms.
While Greece will be in a fragile political situation for the foreseeable future, the key thing to watch for in the coming weeks will be any repercussions for other eurozone members. For the past two years, the currency union has seen relative calm in financial markets because the promise of intervention by the European Central Bank kept bond yields at artificially low levels for countries such as Italy and Spain. In other words, there is a mismatch between the situation in the financial markets and the economy on the ground in many states in the euro area.
So far, Greece's troubles have mostly affected the performance of Greece's debt. But after the early elections were announced Dec. 29, Italy and Spain saw small increases in the interest rates for their 10-year bonds, while Germany (traditionally viewed as a safe haven) experienced a dropped. Interest rates in the eurozone are still considerably below the dangerous levels that forced countries such as Ireland and Portugal to seek international bailouts earlier in the crisis. However, a serious spike in bond yields would test the European Central Bank's promise of intervention at a time when the bank is going through internal frictions because of its recent policies to boost growth in the eurozone and the possibility that it will apply quantitative easing.
The events in Greece are a reminder of the intimate connection between political uncertainty and financial instability in the eurozone. They are also a reminder of the increasing gap between voters and the traditional elites in the European Union. Spain, another Mediterranean country, will also hold elections in 2015. Spain also has a very popular left-wing party that proposed the reversal of austerity measures and the renegotiation of its foreign debt. Europe's debt crisis was not really solved in 2012 — only delayed — and now we are beginning to see the next chapter in the drama unfold.