The beginning of May brought yet another turning point for the euro, created as usual by Greece. This time it was the rebellious populace, rather than earlier spendthrift governments, who put the boot in. The general election vote went squarely against austerity. Establishment parties – New Democracy and Pasok- suffered a severe erosion of support and the upstart anti-austerity Syriza party took third place behind them.
Syriza wants to renegotiate the austerity conditions imposed by the EU as a condition of the February bailout of Greece. Its refusal to co-operate in a coalition with any pro-austerity group forced a re-run of the election, which will take place on 17 June. Opinion polls make Syriza the favourite to win next month’s election. It raises the spectre of a new Greek government refusing to toe the austerity line and provoking the cessation of bailout payments from the EU/ECB/IMF troika – Greece’s only source of funding.
With its income cut off, Greece could not repay its borrowings and would have to default, perhaps leading to departure from the single currency and perhaps from the EU. The repercussions would be hugely expensive, not just for Greece but for Euroland and even Britain too.
Although this catastrophic outcome is far from a certainty, investors can see the writing on the wall and they have been deserting the euro. Since early May its biggest losses have been against the US dollar and Japanese yen but it has also fallen against the pound, touching its lowest level since November 2008.
EU leaders must pull something out of the hat to persuade investors – and Greek voters – that they have the will and the ability to fashion the proverbial silk purse out of this sow’s ear. If they fail to do so the euro will fall further.