It’s Groundhog Day in Europe, as Talk of ‘Grexit’ Returns From the Grave

With the left-wing Syriza coalition surging in the polls ahead of the Jan. 25 snap elections in Greece, it’s worth recalling a joke about its leader, Alexis Tsipras, popular in conservative political circles in Athens: “On Tuesdays, Thursdays, and Saturdays he wants to stay in the eurozone, but on Mondays, Wednesdays, and Fridays we’re back on the drachma, and on Sundays he wants a referendum.”

But never mind the joke. Polling showing Syriza on the cusp of a “decisive” victory has Europe once more talking about the possibility of a “Grexit,” the headline-friendly term for a Greece abandoning the euro and leaving the currency union. On Saturday, Jan. 3, Der Spiegel reported that German Chancellor Angela Merkel believes Europe is well-poised to deal with the scenario, in marked contrast to the panic that such speculation last provoked in 2012. “The danger of contagion is limited because Portugal and Ireland are considered rehabilitated,” the magazine quoted a German government official as saying.

But the mere mention of Greek financial instability has markets freaking out. German bonds are hitting record lows, and the euro is plummeting against the dollar. All on speculation about something that isn’t going to happen.

In the game of brinkmanship that is European economic politics, facts mostly matter only as far as they serve various negotiating positions and drive market jitters. While the conservatives’ joke about Tsipras speaks to the maddening vagueness with which he has approached the issue of leaving the eurozone, there is little reason to believe that he supports abandoning the eurozone this time around.

Writing in the Huffington Post on Monday, Tsipras laid out something of a manifesto for his coalition of left-wing groups. He makes no mention of dropping the euro and pushes instead for debt relief for Greece.

“The Greek and European people have nothing to fear. Because SYRIZA does not want the collapse but the rescue of the euro,” he wrote. “The debt problem is not only Greek but European. And Europe collectively owes a discussion as well as seeking a sustainable European solution.”

Should Syriza indeed win this month’s elections, Tsipras will be poised to make history as the first populist leader to take power in Europe in the aftermath of the continent’s protracted economic crisis. His chief battle will be with his country’s creditors, principally the IMF and the European Central Bank, in addition to Berlin. He will likely seek relief for Greece’s 300 billion euro debt and the renegotiation of the terms of the Brussels-imposed austerity package.

Abandoning the euro is off the table in large measure because the Greek economy has staged a quiet comeback in the past year. The economy is growing, and Athens is running a primary budget surplus. Leaving the euro would indeed be a catastrophe — “Lehman Brothers squared” in the words of University of California, Berkeley economist Barry Eichengreen over the weekend — and that’s exactly why Tsipras won’t do it.

Rather, Tsipras is trying to rebalance the relationship between Athens and Brussels in favor of debt relief and less austerity in Greece, where constant budget cuts have had devastating impacts on a wide variety of human development indicators.

Merkel apparently understands this dynamic better than European financial markets, which are pushing down yields on German bonds in a flight to safety. Her comments that Europe can handle a Greek exit (that won’t happen) are in all likelihood an effort to decrease Tsipras’s leverage in future negotiations. By making the possibility of Greek exit seem less calamitous, Merkel undermines Tsipras’s one trump card in negotiations — the idea that he would burn down the European financial system to salvage Greek independence — and continues to promote her vision of austerity of politics.

Indeed, European leaders view a possible Grexit with deep skepticism. The Financial Times’ plugged-in Brussels correspondent Peter Spiegel reports that some European officials even think Tsipras could become a Greek version of Luiz Inacio Lula da Silva, the former Brazilian president and onetime radical who led that country’s economic transformation.

If he wins, Tsipras will probably extract some concessions from Brussels, even as the European financial markets panic over a highly unlikely worst-case outcome. It’s that endgame, rather than a mythical Grexit, that Merkel is now trying to forestall.

Photo by ANGELOS TZORTZINIS/AFP/Getty Images