The Euro’s Long Goodbye to Greece
The Brussels summit didn’t come up with a deal. Tiny Greece is gambling on chutzpah while Germany holds all the cards.
BRUSSELS — Although Angela Merkel’s pose was awkward alongside Russia’s Vladimir Putin in Minsk, Belarus, on Wednesday, the German Chancellor winced even more the following day when she met the new Greek Prime Minister, Alexis Tsipras, at a European Union summit in Brussels.
Tsipras, who swept to power last month on an anti-austerity platform, is seen by Merkel and much of the E.U. establishment as a spoiled child throwing a fit because he was refused candy. But Tsipras, who leads the radical left-wing Syriza party, has a clear democratic mandate to end the European Union’s €240bn ($272bn) bailout and ease what he sees as its choking demands.
The stage is now set for a standoff as the new Greek government tries to renegotiate terms with its E.U. and IMF creditors, or risk tumbling out of the eurozone altogether.
Who will blink first? For the moment, the two sides are posturing rather than negotiating. Greek finances were not on the agenda of the Brussels meeting, but they were discussed in the margins. Tsipras merely agreed with eurogroup president Jeroen Dijsselbloem that Greece would start talks with the troika of the European Commission, IMF and European Central Bank, “at a technical level….to assess the common ground.”
For some, Tsipras’s election takes Greece closer to “Grexit,” ejection from the single currency, a specter that has stalked policy-makers ever since the euro crisis erupted five years ago. But in Brussels, Berlin and Frankfurt, home of the ECB, officials are remarkably calm about the risks that the new government in Athens might represent.
This is despite a defiant performance by Tsipras and his team since the election, issuing bold rhetoric about how they reflect a new paradigm within the EU. Indeed, their initial campaign seemed like a double down designed to antagonize their most important creditor, Germany: Tsipras’s European tour conspicuously bypassed Berlin, while his finance minister Yanis Varoufakis coarsely dredged up the prospect of Germany paying back Nazi war debts.
Tsipras says that 1.5 million people lost their jobs under the bailout, output is down by a quarter, a quarter of the country is unemployed, and 2.5 million are living below the poverty line. He has promised to raise the minimum wage, restore pension increases, rehire public servants and scrap privatization projects, all in a clear breach of Greece’s bailout terms.
Greece’s creditors have yet to concede ground. Berlin insists that the system cannot function credibly if a small country attempts to blackmail the core. This is in spite of a potential default trigger at the end of the month: the current bailout program expires on February 28, meaning Greece could run out of cash, unilaterally defaulting, and be forced out of the euro.
Merkel and others are signalling that Grexit would be manageable. Greece accounts for just over 2 percent of the eurozone economy and just 0.3 percent of the world’s. Jim O’Neill, former head of economics at Goldman Sachs, has noted that China creates an economy the size of Greece every three months.
Crucially, Berlin says that the eurozone is much better placed to weather a Grexit than four years ago. Banks have used the time to capitalize better and limit exposure to Greek assets. The economic fundamentals have changed, according to Daniel Gros, director of the Center for European Policy Studies (CEPS). “Over the last two years, the eurozone’s other peripheral countries have proven their capacity for adjustment, by reducing their fiscal deficits, expanding exports, and moving to current-account surpluses, thereby negating the need for financing,” Gros says. “Indeed, Greece is the only one that has consistently dragged its feet on reforms and sustained abysmal export performance.”
The ECB’s plan to purchase sovereign bonds is an additional shield to the peripheral countries. It also explains why Greece has few friends, even among other bailout nations: Ireland, Spain and Portugal have gone through their own punishing austerity, and are loathe to see Greece wriggle out of its obligations.
But if Athens’s economic leverage is limited, there are still political risks. Syriza is the first of the populist protest movements to gain power. But in Spain, Podemos, formed just one year ago and making similar demands, is leading in the opinion polls ahead of general elections later this year. From the right, the anti-E.U. French National Front and the UK Independence Party are also surging.
As the established political system fragments, insurgents from the left and the right will be watching Syriza for inspiration. “For much of Europe, the biggest danger of the Syriza win is less the collapse of the euro than the collapse of mainstream politics,” says Mark Leonard, co-founder and director of the European Council on Foreign Relations.
There may still be a room for compromise. While much of the eurozone has been echoing Merkel, there are many governments with misgivings about austerity. Even the European Commission has suggested that the E.U. should be more focused on seeking structural economic reforms than adhering to indiscriminate budget cutting.
This is where a deal could emerge. Tsipras has been vocal about rooting out corruption and fighting tax evasion. And he has already tempered his language, dropping his demands for an immediate debt write-down. There is scope for help on Greece’s debt and the budget, if the Tsipras administration can make the economy more competitive.
According to Jacob Funk Kirkegaard, a senior fellow at the Washington-based Peterson Institute for International Economics (PIIE), European leaders would reap a huge potential political prize from winning concessions from Tsipras, bringing him into the political mainstream and defanging radical leftwing movements elsewhere.
“A deal would also bury the long-term populist threat in Europe that many have long warned against,” Kirkegaard says. “Forcing Syriza toward the center would be far better than laying waste to its economy to teach a lesson to leftists in other countries, including Podemos supporters in Spain.”
So, while the coming months could be very volatile, a deal is not impossible. Pointedly, moments before meeting Tsipras on Thursday, Merkel, said a compromise was possible, while underlining, "Europe's credibility depends on us sticking to rules".
As Europe’s matriarch, Merkel knows how chill political realities can cool hotheads. Even though she holds the strongest cards in this game, she wants a win that works for everyone, even Tsipras.