Cloud over Europe as Greek voters prepare next chapter

EUROPEAN DIARY:Some in Athens appear set to call Brussels's bluff on Sunday. But the euro zone has primed itself for an exit

IN THE early days of the debt crisis, European Commission chief José Manuel Barroso decried what he termed “the intellectual glamour of pessimism” about the outlook for Europe. As Greece faces into its second election in as many months, there are many who would argue that pessimism is more the prerogative of the realist than anyone who might glamorise doom.

No one knows what will emerge after Greeks cast their ballots on Sunday. The campaign has been a tumultuous affair, the sense of unpredictability being characterised by a far-right politician’s assault on two female left-wing rivals on live television.

Greeks have been warned that the country risks running out of money within weeks, local reports suggest depositors have withdrawn billions of euro from banks and a shortage of cash in the power company threatens electricity blackouts. There is plenty more of this grim stuff, but the picture is clear enough.

Even if a pro-bailout government can be formed, its longevity would be threatened from the off by the severity of the austerity programme it must follow. On the anti-bailout side, the nascent Syriza movement has made repudiation of the EU-International Monetary Fund deal an article of faith.

Syriza’s charismatic leader Alexis Tsipras is betting that Europe would never cut off the country’s bailout loans for fear of stoking uncontrollable contagion in financial markets. The counter-argument goes that Europe is better-equipped these days to deal with a Greek departure from the single currency.

It is simply not possible to prove this point in advance of any exit – and most protagonists in the saga would rather not try out the theory. At the same time, Tsipras’s claim there is an alternative course to the current EU-IMF “memorandum” is seen as indulgent nonsense.

Top-level European sources say there may yet be scope to tinker on the margins of the programme but no leeway whatever to dilute the core.

To observers in other euro zone countries Tsipras’s brand of electioneering smacks of a supercharged game of chicken with European leaders – and German chancellor Angela Merkel in particular. This goes down very badly in Berlin.

“We cannot tolerate a situation where we have international negotiations where agreements are made and people don’t stick to the agreements made. We cannot tolerate a blackmailing situation,” says Ferdinand Fichtner, head of forecasting and economic policy at the German Institute for Economic Research.

Notwithstanding the risks involved in any departure, Fichtner says the process would be essentially manageable. “Greece exiting the monetary union would be a bad situation but it would be tolerable,” he adds. This reflects huge unhappiness in Europe – which is not confined to Germany – at the failure of successive Greek leaders to execute reforms promised in return for aid.

It’s one thing, of course, for a think-tank man to speculate in this manner, quite another for the chancellor to endorse such a move. Yet there are many in Brussels and other capitals who say persistent talk of contingency planning for an exit is far more than warning shots into the sky.

This appears like routine fare for the Euro Area Working Group (EAWG), the powerful committee of finance ministry officials which prepares the work of the euro zone finance ministers.

The sense prevails that the Greek financial system is creaking. The chatter this week centres on the prospect of capital and border controls to halt a full-blown bank run – and limits on ATM withdrawals. “Of course the EAWG is discussing contingency plans. How can you possibly expect that they wouldn’t be?” says an exasperated Brussels official.

Many factors are at work. One is the sense that anti-bailout leaders have not come to terms with the impoverishment and woe which would follow an exit and the inevitable devaluation of the new drachma. Another is the argument that the same leaders would be likely to seize on such a situation to buttress their own position by charging Europe with an uncaring indifference to the travails of ordinary Greeks.

At the same, the argument is made that voters cannot be in any doubt as to the issues at stake in the election. Dr Merkel’s unheeded call for a referendum on euro membership on the same day as the election was seen as an attempt to change the terms of the debate.

Meanwhile, high-level euro zone officials say the impact of the debt-restructuring deal for Greece in February is enormous. More than €100 billion was written off the value of the country’s privately held debt, an endeavour long resisted by the European Central Bank on grounds that it might detonate an explosion of turmoil. In the event, nothing of the sort happened.

It is for this reason, primarily, that officials say a “Grexit” can indeed be contemplated if the country votes to spurn the bailout.

Although there can be no certainty that Europe would cut Greece loose, hopes for a clean settlement of the saga are fading fast.