Tsipras: Pandering to the Radicals?

The more time passes, the deeper Greece is descending into a costly renewed recession.

June 11, 2015

Credit: Blömke/Kosinsky/Tschöpe - Wikimedia Commons

Has Greek Prime Minister Tsipras learned nothing in the last four months? Facing strong opposition within the Syriza party to virtually any deal with creditors, he now seems to have gone backwards rather than forwards, demanding major debt relief while rejecting pro-growth reforms.

As in the wild days upon taking office, he is shying away from taking tough decisions and is alienating potential friends at home and abroad, while not confronting the hard-line radicals in his own party.

As a result, he is driving Greece even closer to the brink.

Judging from Tsipras’s recent behavior, it looks like he is not yet ready to put the interests of his country before the ideology of Syriza’s economically illiterate radicals.

From a distance, it is impossible to know whether Tsipras’s stance is just utter incompetence or a deliberate tactic.

Is he really hoping that his barely veiled threat to lead Greece into economic suicide will scare Europe into ditching the rulebook that has been so painstakingly built up among 19 countries over the last five years?

Or is Tsipras taking a radical stand just to strengthen his credibility with the left wing, so that it becomes easier for him to make a deal with his radicals in the last minute?

If so, he would once again be raising expectations that he cannot possibly meet and setting himself up for an even bigger backlash from his ultra-left.

Reality check

Contrary to what Tsipras publicly claims, Europe is not bluffing. It would very much like to keep Greece in the Eurozone, but not at the price of visibly rewarding a blatant breach of economic logic. Europe won’t blink.

Neither the International Monetary Fund (IMF), nor the parliaments of European lenders could agree to a “soft” deal that would keep Greece’s pension system unsustainable in the long run, at the expense of taxpayers elsewhere.

The same holds for the discussion about the required primary surplus and key pro-growth reforms.

Time is running out. A deal ought to be struck roughly by June 20 so that it could be ratified before the current bailout expires and Greece misses its €1.6 billion payment to the IMF on June 30th.

Any deal that deviates substantially from the old agreement with the Samaras government would have to be ratified, for example, by the full German Bundestag, where many members of Parliament are asking for more time to take a closer look at any deal.

Dangerous tactics

The repeated Greek claims that an agreement is “imminent,” while refusing to ditch Syriza’s impossible election promises seems absurd.

The Greek radical government is defending its “red lines,” offering very few of the structural reforms that Greece needs to become competitive and hence fiscally sustainable.

Instead, it is proposing, step-by-step, a few new ways to raise revenues. This tactic is dangerous, for two reasons:

First, it makes it difficult for lenders to agree to a deal, because — without serious pro-growth reforms — Greece could turn into a structural basket case.

Second, even if exasperated lenders accepted such a deal, it would be the wrong sort of deal. Constraining demand (raising tax revenues) without increasing supply is the opposite of what Greece needs to grow out of the Tsipras recession.

Mr. Tsipras seems ready to take his poor country to the brink. It is unclear how this will end. One thing that is certain is, the more time passes, the deeper Greece is descending into a costly renewed recession, which will be hard to get out of.

Fortunately, contagion risks for the rest of the euro-zone remain well under control — no matter how much the Greek government tries to talk them up.

Takeaways

It is impossible to know whether Tsipras’s stance is just utter incompetence or a deliberate tactic.

Europe would indeed like to keep Greece in the Eurozone, but not at the price of breaching economic logic.

Constraining demand without increasing supply is the opposite of what Greece needs at this point in time.