Eurozone fears a deal with Tsipras more than Grexit

6/1/2015

By Peter Spiegel

Leftist firebrand presents EU leaders with a political problem, not an economic one

The last time Alexis Tsipras came this close to power, you could almost smell the panic.The leftist firebrand emerged from nowhere to come within a hair’s breadth of unseating Greece’s two mainstream parties in national elections three years ago by repudiating Athens’ €172bn EU-led bailout. Without the rescue funding, Greece would have defaulted on its national debt. A bank run was accelerating. An implosion of the eurozone and global economic catastrophe loomed.      

So after an inconclusive first election in June 2012, EU leaders engaged in a bit of fearmongering — justified by the fact that their fear was real. Vote for one of Greece’s two mainstream parties in a second election, Greek voters were told, or “Grexit” and Armageddon would follow.

“What alternative did we have?” recalled one senior European leader involved in the campaign, acknowledging the message was akin to requiring Greeks to re-elect those who got the country into trouble in the first place. “Those were the parties that wanted to keep Greece in the euro.”

With Mr Tsipras’s Syriza party leading in opinion polls ahead of snap parliamentary elections on January 25, the fear campaign has ratcheted up again. Political allies of Angela Merkel, the German chancellor, have warned they are prepared to let Greece leave the euro (just as German ministers did in 2012). Pierre Moscovici, the EU’s economic chief, has implied Syriza’s economic plan is “suicidal”. Grexit is again on everyone’s lips.

But privately, European officials acknowledge that 2015 is not 2012. Nobody really believes Grexit is imminent. The European Central Bank is poised to launch a major round of sovereign bond buying. Commercial banks have been recapitalised. And Greece, despite all its continued troubles, is nearly self-sufficient. It has run a primary budget surplus (before interest payments) for more than a year. It returned to the private capital markets last year and its economy started to grow after six years of recession.

The fearmongering this time is based on a different fear: that Mr Tsipras may usher in months of political uncertainty highlighting to markets that the eurozone is still weighed down by high debt, weak growth and political instability despite five years of efforts to clean up the mess.

At the core of Mr Tsipras’s economic platform is debt relief, an idea so unthinkable that nearly every mainstream economist has advocated it. With the collective amnesia that occasionally befalls the EU, it is easy to forget that in November 2012, eurozone finance ministers actually committed to granting Athens additional debt relief once it ran a primary surplus — a promise unfulfilled for more than a year.

How radical is Mr Tsipras’ idea of a Paris Club-style debt restructuring? So radical that, according to three officials involved in the discussions, eurozone officials actively considered such a plan in late 2012. The French-led initiative would have led to Greece’s debt obligations being cut in tranches — much the same way bailout aid is granted — after meeting a series of economic reform commitments.

Officials who have met Mr Tsipras since the fear-filled 2012 elections relate how reasonable he is in person. Most think that with power within his grasp, he wants to govern and realises he can do so only from the centre, even if a third of his party are Marxist radicals. He will probably have to find coalition partners, which will give him an excuse to moderate, they believe. Some even hope he could become Greece’s Luiz Inácio Lula da Silva, the one-time radical labour leader who became Brazil’s most important reforming president.

Mr Tsipras presents EU leaders with a political problem, not an economic one. Can they strike a deal with a man who has threatened to abandon reform commitments? Could someone who once advocated overthrowing the system stick to a grand bargain that lowers Greece’s national debt to more sustainable levels? And wouldn’t cutting a deal with Syriza only embolden other radical parties, such as Spain’s far-left Podemos?

A Greece governed by Mr Tsipras condemns the eurozone to renewed political uncertainty. But, like the markets, most European officials appear to have priced in a Tsipras victory. The challenge is no longer the eurozone’s survival, but the bread and butter of everyday politics: finding a mutually acceptable compromise.

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