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Analysis
Impossible trilemma for Tsipras

Impossible trilemma for Tsipras

Sisyphean task on Syriza as proxy battle looms 

by David Marsh

Mon 26 Jan 2015

Alexis Tsipras, likely to be Greece’s next prime minister, will have to resolve the latest version of yet another ‘impossible trinity’: relax the economic squeeze, accomplish full-scale debt rescheduling and stay in the euro. Satisfactorily achieving all three aims may be well-nigh unachievable. Tsipras will make a mighty effort, while the rest of the world – drawn to Athens in a way that would never be the case in the absence of crisis – looks on in fascination and bemusement.

After yesterday’s sweeping victory of Greece’s anti-austerity Syriza, it will be difficult for European leaders, led by Germany, to proclaim ‘business as usual’ in the Sisyphean task of keeping the euro on track to stability. On forthcoming high-profile visits to European capitals, Tsipras will use a mixture of silver-tongued entreaties and old-fashioned financial blackmail to try to get his way.

For the first time, a leader is poised to take power in a member state espousing policies that are diametrically opposite to the euro bloc mainstream. Plenty of other potential pretenders to government office, not least in Spain, where the left-wing Podemos party gave Syriza conspicuous support during the election campaign, wait in the wings.

On the side-lines, the leaders of France and Italy, facing their own tussles with the forces of economic orthodoxy in Berlin and Brussels, will be urging  Tsipras to undermine the purveyors of rigour. The result in coming weeks will be a grand-scale proxy battle between creditors and debtors in the euro area.

The chief casualty of this probable disarray will be the value of the euro. The currency-softening statement by Mario Draghi, the European Central Bank president on 7 August – ‘Other central banks have been reducing their exposure to the euro’ (since when the single currency has dropped 16% against the dollar) – may turn out to be almost as important as his ‘do whatever it takes’ announcement two years earlier. Further declines in the euro against major currencies, possibly moving down towards parity against the dollar, look probable. Sooner or later, this will spark negative reactions from the US and China.

Some of the platitudes likely to be mouthed by Europe’s leaders about respecting the will of the Greek people will actually turn out to be true. European creditors owe Greece a debt restructuring promised two years ago. Elements of spending cutbacks and tax increases, made necessary by Greece’s earlier Pyrrhic triumph of living for years beyond its means, will have to be relaxed. However the process will be complicated by the problems of maintaining Greece’s primary budget surplus after the disruption of the election and its aftermath. Greek accession to the ECB’s quantitative easing programme announced with great fanfare last week looks barred for the foreseeable future.

Residual European stock market buoyancy after the fireworks of the ECB move may well be justified by general toning down of tax and spending targets. But it will be an unstable political-economic equilibrium with the threat of setbacks at any time.

Fresh from the bone-crunching blow of last week’s QE programme, German policy-makers face fresh attrition. After being forced to acquiesce in large-scale central bank buying of government bonds (albeit with last-minute concessions over risk-sharing), Germany now faces a serious weakening of another important tenet of its European policies.

An immediate confrontation over Germany’s own participation in the euro is unlikely. But, piece by piece, principal motivations for Germany’s adherence to the euro are being whittled away, while the costs of sharing the monetary area with debtors neither willing nor able to stick to the initial conditions of membership are mounting.

At the very least, this will sharpen the debate over the terms and duration of the Bundesbank’s participation in the quota system of government bond purchases, due to start in March. While keeping to the constraints of euro solidarity, Germany will be looking for  excuses to exit or soften  participation in the programme. Forthcoming tussles with Tsipras may provide an opportunity.

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