Europe's Crisis: What Happens in Greece's Presidential Election Will Have a Global Impact

The European Tipping Point: What Will Greece Do?

June 13, 2012

CNBC - How is it that a small nation with only 11 million people and an economy not even one-tenth of the United States could be so important?

Because the stability of the global economy hangs in the balance as Europe awaits the results of the Greek presidential election on June 17. The election is seen as a proxy for a much larger question: Do the Greeks want to stay in the euro zone - or not?

Meanwhile this week European leaders are scrambling to come up with money and a plan for stabilizing Spanish banks.

Even in the midst of the U.S. election season when domestic politics would normally be paramount, President Obama discussed Greece at a recent news conference.

"We recognize the sacrifices that the Greek people have made, and European leaders understand the need to provide support if the Greek people choose to remain in the euro zone," he said. "But the Greek people also need to recognize that their hardships will likely be worse if they choose to exit from the euro zone."

It is an unprecedented situation in modern economic times. "For the first time since it began in 1999, one of the 17 nations that use the euro will in essence be deciding whether they want it anymore or not," says Peter Boockvar of Miller Tabak.

If the answer is no, economists and leaders across the world fear a potential "Lehman moment" and the potential unraveling of the entire euro project. The cost to the European economy alone could be as much as Euro360 billion, according to one Wall Street analyst, Patrick Legland of Societe General. If there were a follow-on contagion effect in Italy and Spain, he says European stocks would fall as much as 50 percent, and the damaging results wouldn't be confined to the European continent.

Martin Wolf of the Financial Times tells CNBC that he fears we could see a repeat of the worldwide Depression of the 1930s.

An additional thorny issue is that while the rest of the world may see the election as a referendum on euro zone membership, it is possible the Greek people do not. The head of one of the leading parties in Greece is campaigning on the idea that the country can repudiate the tough terms of a bailout from their European partners and still remain in the euro zone.

Alexis Tsipras, the head of the Coalition for the Radical Left (Syriza) has told voters and CNBC the fear in Europe of the potential economic fallout from a Greek exit gives his country leverage to renegotiate a much more lenient set of terms.

Twice in the last two years Greece has received huge loans of at least Euro100 billion each from the other countries in the European Union and the IMF . But in exchange for those loans the Greeks have had to follow a strict set of "austerity measures," including cutting the number of government workers, cutting the remaining workers' salaries by as much as 50 percent, slashing retirees' pensions by 30 percent, raising taxes and fees dramatically, and eliminating collective bargaining rights.

The measures are deeply unpopular in a country where the constitution once prohibited the firing of a government worker. (In theory it still does, but loopholes have been used to get around that.) For two years, massive demonstrations have engulfed the country on a frequent basis as the population deals with unemployment above 20 percent and above 50 percent for young people. Tsipras' message - that the country can renege on the bailout agreement and yet still receive the bailout money - has great appeal and in the last published polls; he had 30 percent of the vote.

But polls also say that the Greek people overwhelmingly want to stay with the euro. The other leading party in the country, New Democracy (ND), led by Antonio Samaris, has painted the election as a choice between staying in the euro (by voting for him), or leaving the euro by voting for Tsipras. One of New Democracy's political ads airing this week on TV in Greece shows a classroom sometime in the future with a teacher saying "Cyprus, Belgium, Portugal, Spain, France - these countries are in the euro zone." Then a student asks, "And Greece? Why isn't Greece in the euro zone sir, why?" More voices, one after the other: "Why?

Why? Why?" and then a voice-over: "With our children's future we don't play games" as it does a slow zoom into the teacher's face, who looks strikingly similar to the leader of the opposition party, Alexis Tsipras.

European leaders have all maintained that for Greece to continue receiving bailout money, it must stick to the previous agreement, and that renegotiation is not an option. But at the same time, they've made enough comments to suggest there could be room for leniency, clouding the message.

If a future Greek government refuses to comply with the previously-agreed bailout terms, and European leaders refuse to give them the next tranche of aid, Greece will have not have enough money to function. The situation will almost certainly cause the country to abandon using the euro and return to printing their own currency.

The effects on Greece would be devastating. Dr. Lucas Papademos, the former technocratic Prime Minister of Greece, warned recently of gross domestic product declining another 20 percent on top of the 20 percent it has already fallen, along with inflation shooting up by 50 percent.

What is unclear is the effect on the rest of the world. Economists fear contagion - the spread of financial panic to other countries like Italy and Spain. Hence, why leaders scrambled this past weekend to ensure there would be money available to back up Spain's vulnerable banks in case of capital flight in the wake of the elections.

Polls indicate the outcome of the election is too close to call, leading to an edgy week for investors.