Greece should not play chicken with the euro

5/1/2015

The year 2014 may be remembered for the striking advance of radical fringe parties across Europe. The months ahead could see one of their number assume power. Greece heads for the polls on January 25, following a failure to agree a new head of state. The far-left Syriza, a party that three years ago barely registered on the national map, is now favourite to form the core of the next government. It may be the most significant election in Greece’s post 1974 democratic history.

Syriza and its leader Alexis Tsipras rose to prominence through outright opposition to the international bailout that the government negotiated in 2012. In the past Mr Tsipras has pushed an alternative policy that would have seen it repudiate chunks of Greece’s debt, reverse public spending cuts and even exit the single European currency.

Three years ago, such threats would have instilled terror in bond markets across the continent. Now, the firewalls erected by the EU to slow financial contagion appear to work; while Greek shares and bonds have swooned, those issued by Spain and Italy now yield less than 2 per cent.

Proximity to power has blunted the ferocity of Syriza’s assault on the bailout regime. Mr Tsipras now declares himself committed to the membership of the euro. Rather than hinting at a repudiation of Greek debt, he talks more moderately of a renegotiation.

If he becomes prime minister, Mr Tspiras will be playing a weak hand. The incoming government will need somehow to raise billions of euros in finance, but in the past three months markets for Greek debt have virtually closed. Greece remains reliant on the “troika” of International Monetary Fund, European Central Bank and European Financial Stability Facility, which together own over three-quarters of its debt. The IMF would be terminally damaged by an explicit debt write off. As the largest creditor to the European institutions, the German government is under intense pressure from its voters not to bail out what they see as “lazy southerners”. Other countries subject to bailout conditions will also be watching closely; any hint that Greek obstreperousness has been rewarded will boost their own anti-austerity parties. Yet the terms that the creditors would insist upon to allay such concerns are precisely the sort of reforms Syriza has always opposed.

Mr Tspiras may well be right that, at over 170 per cent of GDP, Greece’s debt burden is too high for its fragile economy to handle. But with the EU now more prepared to contemplate “Grexit”, a Syriza-led government that genuinely wants to stay within the euro could not risk taking an aggressive stance on debt renegotiation. In the short term, the best it may hope for is a variation on “extend and pretend” that granted Greece financial relief but left official creditors being repaid in full. Such a stopgap solution may buy time until economic and political circumstances are more favourable to a more comprehensive solution.

Syriza’s economic plans are more worrying. Greece’s problems stem from an economy that became ruinously uncompetitive in the years running up to the crisis. The current government has faced up to this, cutting the public sector payroll and making progress reforming the state. Mr Tspiras’ plans would further threaten the development of a modern state that Greece has been struggling to build since the end of its military junta in 1974.

Greece’s exit from the single currency is still a possibility. That the rest of the eurozone no longer sees this as posing an existential crisis represents real progress. But for Greece the stakes remain dangerously high.

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