Greece has been in crisis for some years. The three central actors in the drama have been the leaders of France, Germany and Greece. After last weekend's elections, only one of the three remain in office. The political limits of austerity as a policy have been reached. The future is uncertain. The potential fallout for Australia could be substantial.
For years, France and Germany have insisted the governments of Greece, Spain and Portugal impose painful reductions in salaries, benefits, and pensions on their people. The southern European governments, needing the bailout funds to service their loans, have grudgingly agreed, until now. A floating exchange rate allows uncompetitive economies to regain their competitiveness through devaluation. A fixed exchange rate, such as the euro, allows no such relatively painless adjustment process.
The only way to make a nation's exports more competitive when its exchange rate is fixed is to cut input costs - that is, reduce actual wages. Imagine if next month, with no reductions in your cost of living, your salary was suddenly reduced by one-third, or even halved. How would you cope? This is what many Greeks, Portuguese and Spaniards have lived through in the past year - those, that is, who are lucky enough to be employed. Every second Greek under the age of 24 cannot find a job.
Austerity is a policy that can work in the long term. If Germany bankrolls the southern economies for long enough, they may emerge as new leaner entities able to stand on their own feet. This has been the hope of northern Europe. No northern leaders, however, have had the courage to tell their voters how long this process may take - five or 10 years. In the meantime, the social suffering in the southern nations will be extreme. And the leaner economies that could eventually emerge won't have invested strongly in the education and health of their people.
You can see why this future is unappealing to voters and on the weekend they said no to it. Austerity could only ever work in the long term, and its short-term consequences have proven politically intolerable. Higher retirement ages, fewer annual holidays, reduced benefits, these are one thing. Massive unemployment and massive reductions in wages impose another order of suffering all together. At the weekend, Greece voted in the main to elect parties from the far right and far left who are opposed to austerity. At the weekend, France elected Francois Hollande, its first socialist president in nearly 25 years, and a man opposed to austerity and committed to pro-growth responses to this crisis. On the weekend, the political landscape in Europe changed profoundly. What does all this mean for us?