The outcome of yesterday's Greek elections gave the euro a boost with a narrow victory for New Democracy, a center-right party committed to the bailout and reform package needed to keep Greece in the eurozone. But even with this much-needed dose of good news, the Greek economy, and the eurozone more generally, face markets that remain unconvinced that the EU is on the path to restoring fiscal health.
The vote's symbolic impact is at least as important as its policy consequences. The parliamentary elections were effectively a referendum on the euro, with the left-wing Syriza party--which came in second--running on a platform that called for scrapping the bailout and rejecting many of the economic reforms that are part of the austerity package. At a time when parties skeptical of European integration have been surging across the union, a victory for New Democracy, even if a narrow one, revealed that many Greeks are prepared to tolerate more austerity in order to maintain the country's good standing within the EU.
Despite the vote's outcome, the Greek economy is by no means out of the woods. New Democracy first needs to form a governing coalition; the Socialists (Pasok) are the most likely partner. And even after a stable coalition is in place, the new government will likely seek to negotiate with its lenders adjustments to the bailout package. It will also face the unpopular task of implementing new austerity measures.
In the meantime, European leaders are scrambling to address ongoing market uncertainty about the fiscal health not only of Greece, but also Spain, Italy, and other eurozone members. They are appropriately debating long-term fixes, including mechanisms to collectivize debt and tighten integration on fiscal policy and banking--topics that will be on the agenda at an EU summit next week. These are, however, long-term projects. In the near term, the EU will likely need to increase the resources available for bailouts in order to calm the markets.
G20 leaders meet in Mexico today and tomorrow against the backdrop of the ongoing financial crisis in Europe. All eyes will be on German Chancellor Angela Merkel, who is facing growing pressure to take bolder steps to shore up the eurozone.
But the G20 is unlikely to do more than exhort Germany and its EU partners to action. Although some additional funding for IMF participation in the bailout may be forthcoming, the United States as well as the main emerging economies have made clear their reluctance to be more directly involved in helping to alleviate Europe's financial woes.