European Markets Eye an Austerity-Weary Greece

http://www.nytimes.com/2014/12/18/world/european-markets-eye-an-austerity-weary-greece.html

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ATHENS — Alexis Tsipras stood in a packed hall on a recent afternoon and pumped his fist toward a cheering crowd.

“Financial markets have been forcing Greece to dance to their tune,” Mr. Tsipras, the firebrand leader of Greece’s leftist Syriza party, shouted during a rally on the island of Crete. “Now, we will lead the dance, and the markets will follow!”

It was the kind of talk that has built Mr. Tsipras a powerful following in this austerity-weary country. It has also spooked international investors as Greece faces the possibility of an unexpectedly early general election that could bring Mr. Tsipras and his party to power next year, opening the door to a sharp change in the nation’s relationship with Europe and even a rethinking of its commitment to continued membership at all costs in the European currency.

But while Greece is being closely watched by the rest of the European Union and global financial markets, the machinations here have not yet produced the sense of crisis felt across the Continent in 2012, when it last seemed possible that the country could drop out of the euro.

In Brussels, in national capitals and on trading floors, there is a general sense that Europe could survive a breakup with Greece, if it came to that, with relatively minimal damage, thanks to an array of recent regulatory changes and a renewed commitment among the leaders of the largest countries to keeping the European Union moving forward even in the face of setbacks.

The situation is shaping up as the first big test of Europe’s progress in building safeguards against the financial contagion that rocked the Continent five years ago and insulating the core political union against the anti-European populist backlash from both left and right that has taken root in nearly every country.

“If Greece were to step out, this would not lead to an immediate contagion threatening the other countries because financially we have strengthened the system,” said Paul De Grauwe, a professor of European political economy at the London School of Economics. “But other risks — political risks — are still there.”

The first step in the maneuvering toward a possible general election took place Wednesday evening, when Parliament took the first of three votes scheduled over the next several weeks to select a new president, a largely ceremonial post.

If the current center-right government, led by Prime Minister Antonis Samaras, cannot elect its presidential candidate by the end of the third vote, on Dec. 29, it is likely to call a quick general election, which polls at the moment suggest Mr. Tsipras’s party would win. The government got 160 votes on Wednesday for its candidate, 40 short of the 200 necessary to prevail in this round and 20 short of the 180 necessary in the third and final round.

Though Greece and other European economies are still reeling from the effects of the long-running debt crisis, new firewalls designed to insulate the eurozone from widespread turmoil appear to be working. A pledge by the European Central Bank to do “whatever it takes” to prevent a resurgence of the crisis has kept markets calm. Two new institutions that aim to provide financial assistance to weak countries have created added insurance.

Regulators have centralized their oversight of European banks to make sure none are taking the types of risky bets that helped ignite Europe’s debt crisis. And other nations that were forced to take billions in taxpayer bailouts during the crisis, including Ireland and Spain, have recovered and are less likely to be tainted by any new financial tremors that Greece might produce.

“The architecture of the euro is much more solid, and an escalation of the crisis similar to what we saw in 2012 from any potential escalation in Greece is unlikely today,” said Martin Lueck, an economist at the Swiss bank UBS in Frankfurt.

The biggest remaining vulnerability to any shock induced by Greece may be political. With unemployment still high in most countries, national governments still cutting back on social welfare programs and divisive issues like immigration fueling intense debates, populist and nationalistic appeals from both left and right have resonated across the Continent, many of them with a distinct anti-European message. Should Mr. Tsipras take power in Greece, it would give more prominence and credibility to other anti-European parties.

Mr. Tsipras and others on the far right and left in countries including Italy, France and Spain represent a backlash against everything the euro stands for, Professor De Grauwe said. “Today the political elites who are currently in power have invested their capital in keeping the eurozone together,” he said. “But now we have other politicians investing in doing exactly the opposite. Too many countries could at some point say, ‘We don’t want to be part of this,’ and that could still drive the euro apart.”

The longer governments wait to address the underlying causes of economic malaise, said Mohamed El-Erian, the chief economic adviser at Allianz, the more complex the economic challenges and the greater the political complications will be. “Each delay reinforces economic obstacles to growth, empowers extreme political parties, and makes it harder for governments to agree on a common interpretation of the past and present, let alone come together to deliver a better future for the eurozone,” he said.

Eurozone leaders have also shied away from creating a federalist architecture to more readily transfer financial support to weak countries, which economists say is also critical to bolstering the euro’s foundations.

A look at Greece’s problems explains why: Even without such a system, taxpayers in Germany, Spain, Ireland and other nations are partly financing the 240 billion euro bailout being administered by the so-called Troika — the European Commission, the European Central Bank and the International Monetary Fund. Should Mr. Tsipras come to power and compel Greece’s creditors to forgive billions of euros in debt, taxpayers in those countries will lose money.

Mr. Tsipras has said he does not want Greece to leave the eurozone, and has made it a point to soften the fiery remarks he employed during national elections in 2012, when he threatened to tear up Greece’s bailout agreement and default on the debt.

Instead, he wants creditors to accept a write-down of the debt, saying that the nation, reeling from a five-year recession and a 25 percent unemployment rate, can probably never pay back all it owes. But he has threatened to reverse austerity cuts required for Greece to continue receiving its bailout money or a new credit line, including raising the minimum wage and reinstating Christmas bonuses. He has not said how he would pay for those spending increases.

On the streets of Athens, such pledges hold growing appeal. Andonis Koulaxizis, 58, an accountant whose income has slumped amid a five-year recession, said he did not believe Mr. Tsipras could keep any of his promises. But he blamed the current government for worsening the economy, and said the prospect of edging Mr. Samaras from power was appealing, despite the wider risks that might come from fresh political chaos.

“Now is the opportunity to protest what this government has put us through,” said Mr. Koulaxizis, whose clients have lost jobs and earnings, leaving many unable to pay him for his services.

Other Greeks feel more frightened. After Mr. Samaras pushed forward the timing for the selection of a new president, €15 billion was wiped off the Athens stock exchange last week, and foreign investors immediately pulled back from Greece.

“Everything has stopped working, and the conversation about a possible exit is back again,” said a person who helps run one of Greece’s biggest construction companies, who declined to be named for fear of running afoul of politicians.

“We are just on the verge of getting out of a recession,” he said. “Why destroy everything now?”