Tsipras’s bet: Europe hasn’t got the guts

The Greek push for restored sovereignty through debt relief may be the bridge too far for the EU.

Matthew Karnitschnig

Europe’s leaders will decide whether to keep Greece in the euro at a showdown with Alexis Tsipras Monday evening, but they have already given the Greek leader most of what he wants.

Tsipras, a firebrand leftist who rose to power in January by promising to end austerity, has demanded for months that the decision over Greece’s fate be a “political” one. Instead of faceless bureaucrats from the hated “troika” pulling the trigger in a back room, Angela Merkel and François Hollande should be forced to stand up and take ownership of the decision to expel Greece from the eurozone.

Tsipras seems confident they don’t have the stomach for it. Kicking a country out of the euro, relegating it to a future of penury, is not compatible with the European ideal of fraternity. And as infuriated as Europe has become with Athens, its leaders still fear the repercussions of letting Greece fall.

So far, his instincts appear to be right. For weeks, Greece’s negotiators have let the clock for a deal run down as a June 30 deadline approached. They responded to concessions from creditors with a series of half-hearted proposals it was clear the creditors could never accept.

That only changed after Europe’s leadership agreed to grant Tsipras the special summit late last week. A signal Friday from the ECB that it might not keep Greek banks afloat if the meeting ends in failure raised the stakes on all sides. A bank collapse would force Athens to introduce capital controls and trigger the country’s slow exit from the euro zone.

Troika and the Turks

Ahead of Monday’s meeting, officials in Berlin said they were more optimistic that Tsipras was ready to do a deal. On Sunday, the Greek prime minister convened a cabinet meeting to discuss a fresh compromise proposal. In a burst of last minute lobbying, he phoned Merkel and Hollande before flying to Brussels in the evening.

“Maybe he just needs to just come out of one more big meeting with his hair tousled and his shirttails hanging out so he can say to his people that he took things to the line and got everything there was to get,” one of the officials said.

In a country where national pride is rooted in ancient legends about overcoming insurmountable odds, such displays are important. For many Greeks, life under the troika — the institutions that oversee its bailout: the IMF, the ECB and the European Commission — is no less a humiliation than Greece’s occupation by the Nazis or the Ottoman Turks.

Even as Tsipras’ negotiating tactics have turned many Europeans against Greece, his Syriza movement continues to top polls by a wide margin at home. If anything, the party’s reputation for defiance has only been bolstered by the brinksmanship. That all of Europe will descend on Brussels Monday to deliberate the country’s woes adds further confirmation of Greece’s importance.

The strong popular backing for the government’s course and a clear mandate from Greeks to keep the country in the euro (nearly 80 percent say they want to remain in the common currency) could clear the way for a compromise.

If Tsipras can return to Athens from Brussels with a deal that ends the months of uncertainty, he should be able to paper over the differences on substance.

Those differences may be unbridgeable. Beyond the mind-numbing technical details surrounding the size of Greece’s primary surplus, the degree of pension cuts Athens will accept or the appropriate rate of value added tax, lies a more fundamental issue that Monday’s meeting is unlikely to resolve — sovereignty.

The debt knot

Greece has argued for years that the only long-term solution to its crisis is debt relief. Forgiving Greece’s debt is the only way to restore its sovereignty, they say. Under Tsipras and Finance Minister Yanis Varoufakis, the calls have risen to a fever pitch.

The country simply can’t shoulder a debt load of about 320 billion euros, nearly double the size of all of the goods and services its economy generates every year, they say. If creditors would simply agree to halve what they are owed, Greece would be on a sustainable path again.

Many economists agree. Athens even has the support of the IMF, which as a preferred creditor would not take a hit on the more than 30 billion euros it has loaned Greece.

But this debate is less about debt sustainability than trust. By delaying interest payments and extending the maturity of its loans by decades, creditors have already granted Greece a stealth form of mild debt relief. Greece now pays interest rates comparable to France’s. If Athens were to simply follow through with reforms demanded of it, Greece’s economy would return to growth and the debt would be manageable, creditors say.

What Athens misses under the troika regimen is the freedom to spend. Even if the Greek economy expands at a healthy clip, Athens would not have the flexibility it would enjoy if creditors slashed the debt. Reducing Greece’s debt load would ease its return to the bond market. It’s the national equivalent of erasing a consumer’s credit card debt.

Debt relief is unpalatable in Germany and other eurozone countries because it amounts to a free lunch, a direct taxpayer subsidy from one country to another.

But the resistance isn’t just about politics. Berlin and the ECB, in particular, are equally worried that debt relief would open the door for a return to the profligate public spending that got Athens into trouble in the first place.

The fading north-south divide

With debt relief, creditors would lose all of their leverage. Athens would have no more reason to accept the tough labor market, pension system and other reforms creditors are now demanding. They also worry about backtracking in other countries that have received aid.

When Greece negotiated its second bailout in 2012, other vulnerable eurozone countries were sympathetic to its pleas for debt relief. There was wide recognition that Greece’s original program had been too tough, the targets unrealistic.

Since then, the north-south divide has largely disappeared as countries such as Portugal and Spain have started to retool their own economies.

Politicians in those countries were forced to make unpopular reforms to bring spending down and are loathe to let Greece off the hook.

That means any agreement on Monday will likely be a half measure, enough for Tsipras to claim victory, but only until Greece runs out of money again.

Matthew Karnitschnig , Politico, 21-6-2015

Adoraria ver, por uma vez, a Europa com tomates!