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To the edge

28 May 2012 By Hugo Dixon

Greece needs to go to the brink. Only then will the people back a government that can pursue the tough programme needed to turn the country around. To get to that point, bailout cash for both the government and the banks probably has to be turned off.

It might be thought that the country is already on the edge of the abyss. This month’s election savaged the two traditional ruling parties which were backing the bailout plan that is keeping the country afloat. Extremists of both right and left gained strength – voters liked their opposition to the plan. But nobody could form a government. Hence, there will be a second election on June 17.

Will this second election express the Greeks’ desire clearly: stick with the programme and stay in the euro; or tear up the plan and bring back the drachma? That is how Greece’s financial backers in the rest of the euro zone, such as Germany, are trying to frame the debate. But the electorate doesn’t yet see the choice as that stark. Roughly three quarters want to stay with the euro but two thirds don’t want the reform-plus-austerity programme.

The next election is unlikely to resolve this inconsistency – or at least that is the conclusion I came to from a trip to Athens last week. The battle for first place is between Alexis Tsipras, the young leader of the radical left SYRIZA party, and the centre-right New Democracy party led by Antonis Samaras.

A victory for Samaras might seem to offer the hope that Greece will stick with the programme and the euro. He has, after all, campaigned for both. However, even if he comes first – which he did in this month’s election – he will not have a parliamentary majority. He will either have to stitch together a majority coalition or govern a minority government. Neither is the recipe for a strong government.

A Samaras government could theoretically deliver a positive shock by moving full-steam ahead on reforms and gaining so much credibility with Greece’s euro zone partners that they give Athens real help in turning around the country. But it is far more likely that he will be timid and the rest of the euro zone will throw Greece only a few crumbs. The economy, which has gone from bad to worse in the last couple of months of electioneering paralysis, would continue its nosedive, Samaras’ popularity would evaporate and after a few months his government would collapse.

A victory by Tsipras in next month’s election might seem even worse. After all, he will probably set Athens on a collision course with the rest of the euro zone. Last week Tsipras likened the relationship between Greece and the euro zone to that between Russia and America in the Cold War, when both had nuclear weapons that could destroy the other but refrained from firing them. Tsipras thinks the rest of the euro zone is scared that Greece’s return to the drachma would cause the entire single currency to unravel and that the bail out of Athens will continue, even without substantial economic reform.

The impact on the euro zone of Greece’s expulsion would undoubtedly be severe. But the other countries are finally preparing contingency plans to mitigate the damage. Germany, for one, will not be blackmailed by threats of mutually assured destruction.

It is conceivable that Tsipras will blink first, if he wins the election and finds he can’t shift the Germans. But this is unlikely. The typical weasel words of a politician won’t be enough to get him out of a tight spot; he would have to perform a complete somersault. It is doubtful the Marxists in his party would let him get away with this and, if they did, he would certainly lose all credibility in the country.

That said, a victory for Tsipras may paradoxically be Greece’s best chance of staying in the euro because it would bring things to a head rapidly. The country is being kept alive by a dual life-support system: the euro zone and IMF are channelling cash to the government, while the European Central Bank is authorising cash transfers to the banks. If the first tap is turned off, the government will not be able to pay salaries and pensions from July. If the second tap is turned off, the banks could run out of cash within days.

Cutting off Greece’s life support could be the trigger for reintroducing the drachma as the people found the cash machines ran dry. But it could also finally force the people to decide whether they were prepared to back reform – provided the euro zone simultaneously rolled out a proper plan to help the country. A key element of that would have to be to take over the Greek banks and guarantee their deposits, putting the country into a form of financial protectorate.

In such a scenario, a Tsipras government would probably collapse. After all, even if he comes first in the next election, he will not have a majority and so would be relying on coalition partners or governing in a minority. Greece would then need a third election, after which it might be able to put together a national unity government – perhaps even led by Lucas Papademos, the technocrat who ran the country for the last six months.

It is a slim chance full of risks, but probably Greece’s best chance of avoiding the drachma.


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