Can Greece cobble together a coalition?

Even if Athens can throw together a coalition government, growing tensions between other European countries will make the task of renegotiating Greece's austerity conditions especially difficult.

The wave of relief that spread across Europe after the conservative New Democracy party snared a narrow victory at Sunday’s Greek election is fast disappearing as fears grow that it will face a tough struggle to form a stable coalition government.

Preliminary results show that centre-right New Democracy picked up 29.5 per cent of the vote, giving it 128 seats in the 300-member parliament (including the 50-seat bonus that the victorious party picks up under Greek election rules). The radical left Syriza party picked up 27.1 per cent of the vote (or 72 seats), while the socialist Pasok party ended in third place, with 12.3 per cent of the vote (or 33 seats).

Overnight the 61-year old New Democracy leader, Antonis Samaras, declared that he was "relieved for Greece and for Europe” and pledged that he would form a government as soon as possible. European leaders had been hoping for a New Democracy victory, because Samaras, even though he is an ardent nationalist whose support for the country’s reform program is ambiguous, is determined to keep Greece in the eurozone at all costs.

But although both New Democracy and Syriza saw their support rise from the previous election on May 6, neither achieved the majority they need to form government in their own right.

This means that if New Democracy is to form a coalition government, it will need the support of the socialist Pasok party. Pasok, however, is pushing for a national unity government, which would include Syriza. And Syriza’s charismatic leader, Alexis Tsipras, has ruled out joining a coalition government, and plans to continue his campaign against the harsh austerity program imposed on the country in exchange for its latest bailout.

Even if Athens is able to cobble together a coalition, the new government faces the daunting task of renegotiating the harsh austerity conditions imposed on the country in exchange for the massive €347 billion financial rescue the country has received over the past two years. (Loans of €110 billion, €130 billion and €107 billion wiped off Greece’s debt – or the equivalent of one and a half times Greece’s GDP.)

German Chancellor Angela Merkel is resolutely opposed to renegotiating Greece’s bailout, repeating on Saturday that it was "important” the Greeks elected a government that would honour the commitments the country had previously made in exchange for its bailout. However, French president Franois Hollande is more amenable to relaxing the harsh conditions imposed on Athens.

The dispute between Paris and Berlin over renegotiating Greece’s austerity package will put further pressure on their already strained relationship. Last Friday, Angela Merkel, who is coming under increasing attack in France for her dogmatic defence of austerity, lashed out, criticising the "lack of confidence between the actors” of the eurozone, and cautioning against "mediocrity”. In an obvious swipe at Hollande, she raged that "a false debate has emerged that sets growth in opposition to fiscal austerity. That is nonsense.”

Merkel’s harsh words were in retaliation to growing criticism from Paris, with French Prime Minister Jean-Marc Ayrault decrying "simplistic formulas”, while another minister, Arnaud Montebourg, criticised the "ideological blindness” of the German chancellor.

Tensions between Paris and Berlin will also be further heightened by Hollande’s latest proposal for a €120 billion 'Growth Pact’, aimed at providing an immediate boost for struggling European economies.

According to the French weekly Le Journal du Dimanche, Hollande has set out his proposal to invest in major projects in areas such as high-tech, transport and renewable energy, in an 11-page document that was sent to several European leaders, including Merkel.

The document argues that €55 billion of the €120 billion will come from the European Structural Fund. A further €60 billion will come from the European Investment Bank, which, when its capital is increased, will be able to borrow €60 billion on the markets. A further €4.5 billion would come from "project bonds” which will be guaranteed by several European countries. Eventually, the document envisages issuing €10 billion in long-term project bonds.

Although €120 billion is less than 1 per cent of the total output of the European Union, Hollande argues that the investment will have "a ripple effect” throughout the economy.

Berlin, however, has a very different plan for boosting European growth. It has already released its own eight-page document, which argues in favour of boosting growth by increasing labour market flexibility and privatising more government assets. Berlin’s plan, however, rules out extra borrowing.

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