GREEK VOTERS have spared themselves, and Europe, an immediate economic catastrophe — and subjected the continent to weeks or months more of painful suspense about whether its common currency can survive. In an election Sunday, a plurality swallowed its resistance to bitter austerity measures and its distaste for traditional political parties to vote, in essence, for continued Greek membership in the euro and the European Union. But the quick segue in global financial markets from relief to renewed anxiety on Monday reflected the reality that neither Greece nor Europe yet has a credible road map for resolving debt and currency problems.
To restore confidence, Greek and European leaders will have to execute two very difficult tasks. The first will be to agree on a modification of the bailout plan for Greece, which will run out of money within weeks if nothing is done. The second is to agree on consequential and continent-wide reforms and rescue measures that convince markets that not only Greece but also Spain, Italy and France will remain solvent. A failure at either project — but particularly the latter — could plunge Europe, and much of the rest of the world, into a new recession. After months of political dithering and incremental measures, market signals like the still-soaring prices for Spanish bonds suggest that time is finally running out.
Germany and other creditworthy E.U. governments were right to tell Greeks before the election that they could not choose both the euro and an end to austerity and reforms, as several populist parties were promising. Yet now that voters favored parties that supported the last bailout package, it’s time for German Chancellor Angela Merkel and other austerity hawks to make their own bow to reality. For Greece to stabilize, some easing of the terms of E.U. loans will be needed, at a minimum; an extension of deadlines for meeting government spending and deficit targets may also be necessary. Unless it can deliver such a relaxation, there is not much chance the new administration in Athens will be able to push through the huge reforms still needed to make the economy competitive, including privatizations, deregulation and public sector layoffs.
In the end, a Greek slide into insolvency and an exit from the euro may still be unavoidable. That’s all the more reason why E.U. leaders must at last agree on decisive measures to shore up the rest of the currency zone, beginning with Spain and Italy. Measures under discussion for a summit meeting next week, including euro-area bank regulation, are positive but not sufficient. In the end, banks and governments must be provided with sufficient liquidity to restore confidence — something that will probably require the issuance of bonds backed by all euro-area countries, or greatly increased lending by the European Central Bank.
As German officials invariably point out, bailout measures will be wasted unless they are accompanied by significant structural reforms by debtor nations. But without monetary liquidity, and the chance for renewed growth, the euro cannot be rescued.