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Thoughts on the Greek elections

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The Greek election results are in, and the immediate takeaway is that a proeuropean coalition between New Democracy and the Panhellenic Socialist Movement is likely; those two parties were one short of the 151 parliamentary seats needed for a majority before, but have the seats now because New Democracy gained more seats than the Panhellenic Socialists lost.

The specific results are as follows. New Democracy was first with 129 seats; they want to abide by the memorandum already negotiated with the European Union, but also want to negotiate the ability to institute some growth oriented measures. The Coalition of the Radical Left (SYRIZA), who advocated abrogating the memorandum, was second with 71 seats; the Panhellenic Socialist Movement (PASOK), who negotiated the memorandum while in power was third with 33 seats; the Independent Greeks, who split from New Democracy because they didn't accept the memorandum, was fourth with 20 seats; Golden Dawn, an antiimmigrant party often called fascist, was fifth with 18 seats; the Democratic Left was sixth with 17 seats; and the Communists were seventh with 12 seats. Fifteen other parties failed to meet the 3% minimum required to get paliamentary seats.

Some of the changes in support from the last vote were predictable: the Panhellenic Socialists continued to lose support for having negotiated the unpopular memorandum, with some socialist voters shifting towards the Radical Leftists; meanwhile, New Democracy gained votes from the Independent Greeks as those voters decided to vote for staying in the EU. Some changes were not so predictable: the Communists lost half their support, perhaps because Radical Leftists have replaced them as the charismatic option for, well, radical leftists. And there was one change that didn't happen: the polls predicted that Golden Dawn would lose half their support, but they actually stayed close to the 7% of the popular vote that the won before. Apparently half of Golden Dawn supporters aren't willing to admit that support to pollsters.

Assuming for the moment that the coalition government will be formed as expected, what will be interesting will be the upcoming discussions on the next tranche of the bailout. On the face of it, the discussions ought to go well: New Democracy is an advocate of the Greek economy's growing out of their recession, and there has been a lot of talk of "growth" around the E.U. since Francois Hollande started emphasizing it after winning the French presidency.

Unfortunately, what New Democracy says they mean by "growth" doesn't match what Hollande seems to mean by "growth". New Democracy advocates promoting private sector growth by easing taxes, which have been raised as part of E.U. imposed austerity measures - essentially they advocate supply side stimulus. Hollande comes from a background where "growth" means "growth through government spending".

Growth in government spending is what got Greece into its current problems, and will not solve them. The supply side stimulus New Democracy says it wants might do so. However, actually implementing that stimulus will be difficult: Merkel of Germany will have to agree to give Greece some leeway on immediate budget balancing efforts; Hollande will have to agree to permit that leeway to be used on supply side rather than demand side stimulus; and most difficult of all, New Democracy and its coalition partners will have to be willing to carry through on painful budget cuts to allow tax cuts to occur.

The process will be especially difficult since monetary stimulus will not be available to soften the deflationary effects of supply side stimulus, as Greece does not control its own currency. Ultimately, though, that deflation is exactly what is needed: a reduction in the prices of Greek economic output is what will make its economy more competitive, bringing in the money from exports and tourism that will ultimately be needed to repay its debts.