What Syriza's victory in Greece means for Europe

Difficult to see how the party's demands and a Germany-led northern Europe's expectations can be reconciled

In a result that may have far-reaching effects, the left-wing Syriza party won a major victory in elections in the southern European country of Greece. As the news trickled in on Sunday night, concern spread across the euro zone and the wider financial markets. Syriza's platform is essentially one that demands Greek debt be forgiven, and the country's enforced austerity end. Given that Syriza won over 36 per cent of the vote as compared with the ruling party's 28 per cent, there is an increasing belief that the party could govern without coalition partners - not even the right-wing extremist Golden Dawn, which came third in the election. Coming as it did shortly after the stimulus measures from the European Central Bank, the euro slid sharply to $1.1098 against the dollar, its lowest level since 2003. It then recovered some strength in later trading.

It is important to stress what this is not a vote for. It is not a vote for leaving the euro - a vast majority of Greeks continue to favour staying in the currency. Syriza's 40-year-old leader, Alexis Tsipras, has himself tried to avoid making too many headline-grabbing threats on the campaign trail. But the basic party platform will unquestionably lead the new government into a collision course with northern European governments, led by Germany. Northern Europe will not countenance even partial forgiveness of the troubled southern country's debts. And even measures that make debt easier to repay, such as easier interest rates and timings, will likely be seen as being dependent on continuing commitment by the Greek government to fiscal austerity. Mr Tsipras has ruled out exiting the euro; he has been similarly explicitly negative about default or unilateral

repudiation.

It is clear that the markets do not, as yet, see widespread disruption as likely. Although the yield on Greece's own 10-year treasury bonds rose 50 basis points to almost nine per cent, other vulnerable countries - such as Spain and Portugal - saw no disruption. Clearly, there is little concern about panic and contagion. However, most market participants will be bracing for volatility. As Mr Tsipras forms a government and begins the hard process of bargaining with a resolute northern Europe - led by Germany's chancellor, Angela Merkel - there are bound to be moments of brinkmanship. Every apparent crisis may not be a real crisis, but simply hard bargaining - but any one of those moments could destabilise markets that are already shaky for numerous other reasons.

The prospect of a Greek exit from the euro zone itself continues to be considered remote. Yet it is difficult to see how Syriza's demands and northern Europe's expectations can be reconciled. Europe's leaders and its financial institutions would be wise to at least start contingency planning for a prolonged uncertainty, if not for an orderly exit for Greece.