Why the Eurozone May Need to Sacrifice Greece to Save Spain
Eurozone May Not Blink First in Confrontation With Greece
By Simon Nixon
Jan. 28, 2015 6:35 p.m. ET
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Greece's new Prime Minister Alexis Tsipras attends a ceremony this week at a shooting range site in Athens, where hundreds of members of the Greek Resistance were executed by Nazi occupation forces during World War II. Photo: Reuters Alexis Tsipras has been prime minister of Greece for only 48 hours and has done little to back his claim of wanting to keep his country in the eurozone. With just weeks to secure a deal with Greece’s official lenders to prevent a financial collapse, almost everything he has said and done has seemed calculated to deepen the rift with Greece’s creditors.
From his decision to enter a coalition with the pro-Russia, anti-European Union, far-right Independent Greeks, to his appointment of a firebrand Marxist economics teacher as finance minister, to his refusal to back a toughening of the EU’s response to Russia’s latest support for separatists in Ukraine, to his cabinet’s pledge to reverse key reforms, his approach has suggested an appetite for confrontation rather than compromise.
Belatedly, the markets have registered the rising risk that Greece may exit the eurozone, with three-year government bond yields surging to about 17% and the shares of its top banks collapsing by more than 25% on Wednesday.
At a meeting in Brussels earlier this week, now-former Finance Minister Gikas Hardouvelis warned that the deterioration in tax revenues and the pace of bank-deposit outflows had accelerated in recent days, according to people present.
Some eurozone finance ministers and senior officials say that they are more worried about the fate of the European currency bloc now than at the height of the euro debt crisis in 2011 or 2012.
Mr. Tsipras’s problem is that attitudes in the eurozone are also hardening. His strategy appears to be to put himself at the head of a Europe-wide leftist assault against “austerity,” playing to an anti-German gallery in the hope of isolating Berlin. His ambitions might have been encouraged by the disarray that his success has sowed among mainstream European leftist parties.
These now face a strategic dilemma: Caught between Mr. Tsipras’s radical populism and their own acquiescence in the eurozone’s crisis response, their electoral support is crumbling.
The early signs suggest they hope to co-opt Mr. Tsipras to their club. Dutch Finance Minister Jeroen Dijsselbloem wasted no time inviting himself to Athens this week in his capacity as president of the group of eurozone finance ministers, despite having no mandate from the group. This has angered his conservative colleagues, who believe it would have been better to wait for the Greeks to put their proposals on the table first, according to people familiar with the discussion.
Mr. Tsipras and his finance minister have already been in contact with leftist governments in France and Italy. Conservative governments fear the left’s readiness to compromise with Athens may send Mr. Tsipras the wrong signals.
In reality, the eurozone’s beleaguered mainstream left can’t deliver Mr. Tsipras the deal he seeks. A headline reduction of Greece’s debt burden looks out of the question. Germany and Finland have voiced their opposition; other governments feel equally strongly.
Greece already enjoys the longest debt maturities and among the lowest interest costs as a proportion of gross domestic product of any eurozone government, thanks to past bailouts. Some further easing of repayment terms is possible, but governments aren’t prepared to be generous to Greek taxpayers when taxpayers in their own countries are being squeezed. Those arguing that the will of Greek voters must be respected forget that the other 18 eurozone members have democratic mandates too.
A potentially bigger stumbling block is the question of Greece’s reform program. Here, it is Spain rather than Germany that may prove Mr. Tsipras’s most implacable opponent. Madrid is clear that any deal with the Greek leader must be based on reform commitments at least as tough as those demanded of former Prime Minister Antonis Samaras. Anything less would represent a win for Mr. Tsipras and fuel support for Spain’s own new radical leftist party, Podemos.
The Spanish government believes that the turnaround in its own economy—growth is expected to reach close to 3% next year and unemployment fell by 400,000 in 2014—is proof that a robust pro-market reform program is the only way to exit the crisis. Madrid believes that it would be in Spain’s and the eurozone’s best interests to allow Greece to crash out of the eurozone rather than boost support for Podemos and risk the recovery, according to someone familiar with its thinking.
In other words, it may be necessary for the eurozone to sacrifice Greece to save Spain.
Could Mr. Tsipras ever really sign up to the reforms agreed to by Mr. Samaras? That has never seemed likely—and appears even less so following his cabinet’s decision to raise the minimum wage by 30% and block the government’s privatization program. At best, weeks of brinkmanship lie ahead.
Mr. Tsipras may be making a grave error if he is counting on the eurozone to blink first.
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