MONDAY TELEGRAPH: Rubber of monetary union hits the road of Greek democracy

Some 10 million Greek voters went to the polls yesterday, in an election with big implications for the future of monetary union. Even if Greece stays in the single currency, after choosing a party determined to defy the European Central Bank, negotiations over bond repayments between Athens and Frankfurt will be extremely hard-fought. The upcoming rhetorical slugfest, whatever the outcome, will have ripple effects across other “peripheral” members of the 19-country currency bloc which could send global bond markets haywire.

This Hellenic election holds big significance for Britain too. Ahead of our general election in May 2015, fears of renewed eurozone turmoil, which this Greek vote could spark, will bolster eurosceptics across all parties. That could lead to an earlier vote on UK European Union membership.

Whatever the domestic political impact, there’s also the enduring economic reality. Continental Europe remains our largest trading partner by far and, in the EU or not, that won’t change any time soon. As such, Britain can’t stage a full-throated recovery while the eurozone is flirting with systemic meltdown – a meltdown that is now more likely, following this Greek election.

It is almost certain, at the time of writing, that the next Greek Prime Minister will be Alexis Tspiras, leader of the radical-left Syriza party. The charismatic Tspiras has campaigned relentlessly to renegotiate the €350bn (£240bn) debt mountain that Athens owes the ECB, International Monetary Fund, other European governments and private investors.

Greece is €30bn in debt to the ECB, after the eurozone’s central bank bought Greek bonds back in 2010 and 2011, during previous eurozone turmoil. Initial payments are due in just a few months – and it is these terms, in particular, which Syriza will insist are eased. Having launched its controversial quantitative easing programme last week, which will flood the eurozone with €1,100bn of newly-created money, the ECB must now deal with Greece. Those two facts aren’t unrelated.

The UK, like Germany, has ostensibly recovered from the late-2008 Lehman collapse. Real GDP in both countries is back above pre-crisis levels. In Greece, though, inflation-adjusted national income remains over 25pc adrift, this small but intensely proud country having endured a downturn as deep as the great depression of the Thirties.

That explains the success of Syriza – which vows to raise wages and pensions, while rejecting creditors’ “austerity” measures imposed and securing a 50pc cut in Greek sovereign debt. So Tspiras is now on a direct collision course with more prudent nations bank-rolling Greece – such as Finland, the Netherlands and, above all, Germany, the eurozone’s paymaster-in-chief.

Two huge bail-outs in 2010 and 2012 kept Athens afloat, and the eurozone in tact, but the conditions imposed on Greece were tough. That’s why an “anti-establishment” party barely a decade old just smashed New Democracy, which has long been the main player on the Greek centre-right.

We can now expect an extremely muscular discussion between Athens and its main creditors, not least the ECB and IMF. Syriza will scream it has a democrat mandate to reverse austerity measures imposed by foreigners. So unless we see tangible, bankable changes in Greek credit terms, politics could quickly become even more explosive. We could easily see the kind of civic unrest Greece endured during earlier debt-negotiations.

Eurozone creditors, though, not least Germany, will be loathe to accept Tspiras’ demands, not only due to domestic political opprobrium but also the prospect of anti-austerity parties in other “periphery” state then storming to power on now-more-believable pledges to secure re-negotiated bail-outs.

The stakes are so high, then, then both sides – Greece and its creditors – will be forced to threaten a Greek euro-exit in the bargaining, squabbling and outright mud-slinging which will now ensure, even if that’s not what either side truly wants. That’s going to batter the credit rating not just of Greece, but other weaker eurozone members too. The knock-on effects, given the vast, inter-connected debt holdings of European governments and the regions still shaky banking sector, could be ghastly.

Even if Syriza does negotiate responsibly, and a relatively speedy and civilized deal is done, other members enduring EU-IMF austerity programmes will still demand less onerous terms. Why wouldn’t they? So fears will grow Europe is in for a succession of crises, as the impact of caving-in to the pleas of one profligate debtor spreads elsewhere.

Over the coming days, Greece will see play host to victory marches and rhetorical chest-thumping. Once that’s over, vitally important debt-negotiations – the success of which will determine whether we avoid a significant crisis on global markets during 2015 – will quickly fall into obscurantism, all the better to keep the details away from the mainstream media and concoct a workable political fudge.

One possible outcome is the use of “variated zero-coupon perpetuals” – bonds that pay nothing and aren’t repaid, at least not until Greece’s debt-to-GDP ratio falls way below its current 180pc. Another face-saving way of letting Athens off the hook is to use “GDP warrants” – link debt-service to Greece reaching a certain growth rate.

Whatever happens, the prospect of Euro-QE will help sooth fears Greece could spark a bond market meltdown – for now. Yet elections are due in Italy, the real GDP of which remains 10pc down on 2008, the country trapped in a high-currency straitjacket. Italy’s three main opposition parties, all campaigning on an anti-euro platform, will revel in Syriza’s success.

Spain and Portugal will also hold elections in 2015, with anti-euro parties set to make significant gains. Marine Le Pen’s Front National is also anti-euro, and leading some opinion polls. So even France could be brought into the euro-exit mix.

Throughout 2015, then, we’ll see further Greek-style tests for the “European project”, as the rubber that is monetary union hits the road – the hard legitimacy of democratic mandate, the disgruntled voters, across a range of nations, for whom the single currency isn’t working. Will all such problems be hosed-down with printed money? If so, where does it end?

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