Will Greece Be In EMU At The End Of 2015?

 

The Greek political drama is overshadowing the Russian crisis and the plunge the price of oil. A review of old and new media coverage suggests that many observers are repeating the same mistake they made 2-3 years ago. We were one of the few analysts that did not expect Greece to leave the monetary union then, and we expect it to remain in the union now.  

Investors understand economic issues but have a blind spot when it comes to politics. Informed by the liberal and neo-liberal economic determinism, they think politics is simply a function of economic self-interest. This reductionist approach proved wrong before, and it will likely be wrong again.  

They see monetary union and think it is about economics. Yet, monetary union itself is an economic answer to a fundamental political issue: Under what conditions could Germany be re-united with the fall of the Berlin Wall. EMU is fundamentally a political exercise.  

The euro-skeptics smell victory that has eluded them. Every challenge the euro area faces is seized upon as evidence of the folly of monetary union. Every problem a member faces can be resolved by dropping out of EMU and devaluing. Let’s not count the chickens before they are hatched. 

Syriza, the left coalition in Greece, is 2-3 percentage points ahead of the New Democracy (ND). ND’s Samaras heads up the current government, which is a coalition with the ND’s longstanding rival in Greek politics, the Socialists. It is certainly possible that Syriza will win the election on January 25 and lead the next government but it is far from a sure thing.   

Greek politics are fluid, and over the next few days, former Socialist Prime Minister Papandreou is expected to form a new center-left political party.  It will capitalize on the rank-and-file disenchantment with Venizelos, the Socialist Finance Minister.  It is unlikely to emerge as a major party, but it may take 1-2 percentage points from Syriza.