×

Why early elections are bad for Greece

Only eight months after his own election, the Greek prime minister has called for a new general election in September. Why the rush?

There are three reasons why Alexis Tsipras is calling early elections. First, his coalition power in the Parliament has crumbled with 45 of its 162 members voting against the laws of the agreement with the European Union. These laws passed only because of the support of opposition center-right and center-left parties. Second, to maximize his support, the Greek prime minister wants elections quickly, before the full implementation and new heavy taxation of the EU agreement is felt by the public. Third, his rebel members of parliament will have much less time to organize a party to run in opposition to the prime minister. As good as elections are for Tsipras, they are bad for Greece. Here's why.




Alexis Tsipras
Ayhan Mehmet | Anadolu Agency | Getty Images
Alexis Tsipras

The elections add significant uncertainty to an economy ravaged by political and economic uncertainty. Tsipras' administration has been a disaster for the economy. Six months of fruitless negotiations were followed by closed banks, capital controls and very tight cash withdrawal limits. Consumption, as well as imports and exports (that mostly depend on imported raw materials), have fallen dramatically.

Layoffs and growing unemployment are expected in September, after the summer vacation. Banks' deposits and valuations have collapsed and they are in dire need of a new recapitalization. The previous infusion of EU money (borrowed by Greece) of 25 billion euros ($28 billion) is now worth only 2.5 billion. Investments of 11 billion by private parties in Greek banks are now worth only 2 billion.

Read More Greece's Syriza party splits, rebels form anti-bailout front

To top it all, Tsipras has repeatedly stated that he considers the agreement with the EU a result of blackmail, and that his heart is not in it. One wonders whether he will even implement this agreement.

Is there a way forward to recovery for Greece? Yes, but it is not being followed. The way forward is to have a coalition government of all the pro-European parties (New Democracy, center-right, Potami, center, Pasok, center-left, and the pro-European part of Syriza) that in fact voted for the agreement with the EU.

Such a strong coalition will first be able to negotiate more favorable terms of the EU agreement. Second, it will be able to implement it. The agreement aims at a significant reform of the Greek economy at the microeconomic level, including allowing free entry in "closed sectors" such as pharmacies, transportation and legal services, as well as privatizing ports, airports, and railroads. If the reforms are done, the Greek economy will grow and this will be the last bailout for Greece. If the reforms are not done, and unfortunately this is the most likely outcome if Tsipras is re-elected, we will see Greece asking for bailouts time and again.

Read MoreEurope markets plunge; China, oil, Greece worries return

Commentary by Nicholas Economides, a professor of economics at the NYU Stern School of Business. He also has advised the Greek government and Bank of Greece.