The New Zealand dollar has already fallen over three weeks from over 82c to around 76c, mainly on the back of fears over Greece. But that may only be the start of its impact on us. If Greece ultimately departs from the Euro as its currency, they may end up expelled from the EU also. The instability this could tip the world into recession again.

Currently there is no Government in Greece, as they head off to the polls for the second time in as many months. The Acting Prime Minister is Judge Panagiotis Pikrammenos. Ironically one of his more famous judgements in Greece was that it is illegal to imprison people for debt. The entire country is facing debtor prison.

So why is Greece heading back to the polls. Their election on the 6th of May saw seven parties elected to their 300 member Assembly, as well as 18 independents. New Democracy (ND) got 108 seats on 19% of the vote, a 15% drop. They are a centre-right party

The Coalition of the Radical Left (SYRIZA) got 52 seats on 17% of the vote, a 12% increase. It is a socialist coalition and includes several communist parties. They campaigned against the austerity regime of the last few years.


In third place was the Panhellenic Socialist Movement (PASOK) which got 41 seats off 13% of the vote. This was a massive 31% drop for them. They are a centre-left party, but one that accepted that austerity was better than defaulting on their debt.

The ND and PASOK could almost form a Government, but they refused to form one with an agreement with SYRIZA, on the basis their share of the vote dropped 45%. They want the three largest parties to compromise and govern together as a crisis government to get Greece through. SYRIZA has refused, on the understandable grounds that having campaigned against any austerity measures, they don't want to now support them.

Of note and concern is Golden Dawn, now the six largest party on 7% vote and 21 seats. They are a fascist party who use the Nazi salute, organise white power concerts and has a swastika type logo as their symbol. Their leader and founder has convictions for illegal possession of explosive materials. Extremist parties do well, when the mainstream medicine is so unpalatable.

There are three possibilities for the next election. The first is that SYRIZA gains even more support and forms a Government that will then default on its debt. The second is that ND and PASOK gain enough support to clearly govern and continue the austerity programme. The third is another hung Parliament and a third set of elections.

No matter what happens, there is a reasonable chance that Greece will end in default (technically it has been already). Some, such as the new executive director of the NZ Initiative Dr Oliver Hartwich, say it is a matter of when, not if. The Bank of England has already started contingency plans for Greece departing the Euro and possibly the EU.

The Euro is likely to decline in value as Greece, and possible Portugal and Ireland, revert to their old currencies. This means that exports to Europe from New Zealand are likely to decline. In Greece it will be even worse. Their new/old currency of the drachma will probably be worth half a Euro, which means high inflation and a big drop in the standard of living. One expert predicts interest rates for home owners and businesses will double, and a lack of credit may lead to shortages in basic commodities like oil, medicine and food.

That is likely to make the rejected austerity measures seem very mild, in comparison. But by then, it will be too late.

There are some lessons for New Zealand in all this. When the global financial crisis caused a global recession, every country became a Keynesian. Everyone agreed that until the crisis was over, it was sensible for Governments to borrow and run deficits, to try and keep economic activity higher. New Zealand did this, running massive deficits (made even worse by the Christchurch earthquakes).

But such a response should and can only be a short-term response. Eventually you need to get back into surplus and start paying the debt off. This does often require austerity measures, ranging from the massive spending cuts in Greece to the large spending cuts in the United Kingdom to the zero cap on net new discretionary spending in New Zealand. New Zealand is lucky that we started off with a low level of Government debt, but if the world enters a second global recession, we will not do so well if we are still running deficits before the recession.

Governments of both the right and left tend to like announcing new spending. They differ on how much, and where, but most MPs and Ministers enjoy being able to announce more money for various worthy activities. With only a few exceptions (such as Ruth Richardson), Ministers of all parties would rather they never had to do austerity measures. There are very few votes in "not spending" as opposed to "spending".

However as we are seeing in Europe, the alternative to austerity can be far far worse. The future of Greece in the Euro and the EU will probably be decided in months, not years. If they are evicted, we should expect a fairly stormy future as the ramifications will be felt far beyond Europe.