A win for Greek conservatives brings brief respite to global markets rattled in the buildup to Sunday's close vote, but it does little to change the structural dynamics plaguing the eurozone economy.
Greece is no longer on the cusp of default, but will still seek to renegotiate parts of its March bailout in coming weeks, looking to spread the same required budget cuts over a longer time period and to couple them with pro-growth measures like infrastructure spending, said Blanka Kolenikova, a country analyst at the Eurasia Group in London, in a telephone interview with me. The E.U., for its part, has sent mixed signals, with Germany insisting it won't bend terms of the current Greek deal even as France advocates more pro-growth policies.
In Greece, the winning New Democracy and third-place socialist PASOK parties have dominated politics since the country returned to democracy in 1974, jointly governing since late last year. But the odd union of these one-time arch-rivals is sure to strain, likely prompting a new round of elections before the government's term ends in 2016 and narrowing the window for action, Kolenikova said.
For European leaders, the central challenge is bigger, and has been mounting for years: How to stabilize a single monetary union that allows for 17 different fiscal policies? Independent countries could use interest rate policy to devalue their currencies, boosting exports, growth and state coffers; while a more complete union could control budgetary and even labor policy across members, limiting deficits and steadying debt markets and worker flow. Europe, stuck in partial-integration limbo, can do neither.
A European Fiscal Compact signed earlier this year takes a key step towards resolving that, slashing member states' allowable yearly deficits to 0.5 percent of GDP. But it requires at least 12 eurozone governments to ratify it, and so far only those that might be most likely to need the rescue funding to which it would entitle them -- Greece, Portugal, Ireland and Slovenia -- have signed on. The Greek vote leaves that situation unchanged.
"Our worst fears didn't materialize in Greece today, but the problem is still there," Mauro Guillen, director of The Lauder Institute of International Studies at The Wharton School of Business, said on Sunday. "Today's results allow Europe to kick the can further down the road."
Foreign investors have fled Greek, Spanish and Italian debt markets in recent months, skeptical of those governments' abilities to service their loans. Instead, domestic banks are buying up those bonds, boosting local exposure and the potential need for an ECB bailout -- an increasingly common pattern that strains European institutions while leaving untouched the core problem of uneven competitiveness and growth.
Policymakers in Brussels and Berlin have hinted at plans to more fiercely pursue a fiscal and political union, but it could take years for Europe's 17 member states to accept such constraints on sovereignty. Strong economies like Germany's could meanwhile give problem countries a boost with tax breaks or domestic wage hikes that would favor imports from places like Greece, helping to jumpstart growth in the periphery, Guillen said. Or, instead of austerity measures, European leaders could condition future loans on programs that boost productivity in such countries.
"Without some kind of external lifeline, capital injection, bailout of banks, or demand for goods and services, none of these countries can cope," he added. "The straightjacket of the currency union prevents them from adjusting in the usual way, so the rollercoaster ride continues."