Alexis Tsipras: Changing the Euro Zone

A MATTER OF STYLE
Alexis’ style is something not often witnessed in diplomatic circles. He flatly rejects Greece’s previous commitments to the Euro zone. He has promised to end existing contracts and to “permanently lock up the old powers in the closet”. Hundreds of thousands of Greeks voted for him.
Previous Greek administrations fumed and protested against the demands of the Euro zone leaders. But at the end of the day – they had to toe the line. They had to put aside their anger and frustration when considering the consequences of not doing so.
Things began to change when Alexis entered the scene. Euro zone negotiations, based on assumptions of rationality, had to be amended. The dangerous driver, the one you have to watch out for, is the one who does not care about consequences. Crazy drivers are the most dangerous of all.
Crazy or not, Alexis’ surprise electoral success and the prospect this has raised of a Greek exit seems to have triggered a number of developments which have significantly increased the pressure for change. Since the Greek elections, millions of Euros seeking a safe haven are flowing out from banks in the peripheral countries. Borrowing costs for Spain and Italy in the international markets have risen once again to danger levels. Share markets around the world have plunged wiping out all the gains of the previous quarter. Manufacturing in the Euro zone, including Germany, has fallen and business confidence has dropped. The exchange rate of the Euro itself has fallen below 1.24 to the dollar.

CHANGE IN THE AIR
Someone had said that “the prospect of hanging concentrates the mind wonderfully”. The realistic prospect that Greece may leave the Euro following the electoral success of Tsipras seems to have had such an effect. Both sides, the Greek electorate on the one hand and the Euro zone decision makers on the other, have looked into the abyss of a Greek exit and taken a step back.
On the side of the Greek electorate, recent polls for the June 17 elections indicate a small but significant shift. The percentage of votes predicted for New Democracy has risen. Syriza’s share has also risen but it seems that the votes going to the two pro-bailout, pro Euro, parties may now be just enough to put together a new government that will support Greek commitments to the Euro zone.
The biggest change has been in the rhetoric of Euro zone officials. Some that would calmly dismiss talk of a euro break-up now speak quite differently. Following the first Greek elections, a note of anxiety , even panic, characterizes their statements.
Mr. Draghi, the President of the European Central Bank, has openly said that the structure of the currency union has become “unsustainable unless further steps are taken”. Jose Manuel Barroso, has dared to raise once more the subject of Euro bonds, something which Angela Merkel has repeatedly rejected. Olli Rehn, Economics Commissioner, now says that “the way things are going the Euro zone has a significant risk of breaking up”.
Even Mrs Merkel cannot not help but notice that she is increasingly isolated. Her own council of economic advisors, while not mentioning the dreaded and often rejected subject of Euro bonds, has put forward a form of debt-sharing in the form of a debt redemption fund. It does not feature Euro bonds as commonly defined. Nor has it been accepted, but it is definitely a step beyond Angela Merkel’s previous red lines. Hopefully these pressures for change will be sufficient to see that Greece remains in the Euro zone, at least for the short term. This would at least provide time for longer term planning.