Europe’s creditors play with ‘political fire’ in pushing Greece to the brink

“The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. Anything could happen,” warns former IMF bail-out chief by Ambrose Evans-Pritchard, Telegraph The North European power structure has issued stern and inflexible warnings to Greece. Syriza’s triumphant radicals must pay the country’s debts and stick to the letter of the hated `Memorandum’ imposed by creditors. Greek woman walks past anti-austerity sign in Athens If premier Alexis Tsipras breaches the terms of Greece’s EU-IMF Troika bail-out – signed by earlier leaders under duress, and deemed unjust in Athens – Europe will cut off €54bn of support for the Greek banking system and force the country out of the euro in short order. Europe must not yield to “blackmail,” said Germany’s ZEW institute. Wolfgang Schäuble, Germany’s finance minister, said the new Syriza government is bound by the contractual terms of Greece’s €245bn loan package from the Troika. “Elections change nothing. There are rules. We did whatever could be done to support Greece in difficult times, again and again,” he said. When the crisis first erupted in 2010, and re-erupted in 2012, Europe lacked a firewall. The conflagration threatened to spread instantly from Greece to Portugal, Ireland, and beyond. This time Mr Schäuble thinks they are ready. “We face no risk of contagion, so nobody should think we can be put under pressure easily. We are relaxed,” he said. In Frankfurt, the Bundesbank’s Joachim Nagel warned that there will be “fatal consequences” if Greece violates the terms of the rescue deal. His words were echoed by the European Central Bank’s Benoît Cœuré, ubiquitous on the airways with hot admonitions. “Mr Tsipras must pay, those are the rules of the game, there is no room for unilateral behaviour in Europe,” he said. The riposte from Athens has been tart. Greece will not have any further dealings with the Troika and will not ask for an extension of its bail-out at the end of February. “We will not accept the self-reinforcing crisis of deflation and debt,” said the new finance minister, Yanis Varoufakis. The creditors are treating the unfolding drama as if it were a local Balkan affair. If a country of eleven million chooses to commit economic suicide, it is free to do so. The broader consequences will be no greater than the fall-out from Argentina’s default in 2001. That is the message from Berlin. Brussels is for now sticking to the tough line. “We expect them to fulfil everything that they have promised to fulfil,” said Jyrki Katainen, the EU’s economic enforcer. Experts are deeply divided about the wisdom of this strategy, and the implications of Grexit. Professor Luis Garicano from the London School of Economics says it is Syriza that has misjudged badly, both by teaming up in coalition with a virulently anti-German party, and by violating Troika terms across the board – halting privatisation, raising the minimum wage to €750 a month, re-hiring 10,000 civil servants, and blocking mortgage foreclosures. “Tsipras is slapping the Germans in the face: it is almost as if he wishes to be thrown out of Europe. I can’t see any political support for Syriza from any government in southern Europe. They are all terrified of their own populist movements,” he says. Prof Garicano thinks the eurozone can now withstand contagion from Grexit. The economy is on the mend. The ECB’s quantitative easing has covered the currency bloc in a protective blanket. By ejecting Greece – he argues – Chancellor Angela Merkel gains “political cover” to relax austerity and reward those countries that play by the rules. It is a net plus for Europe. “Sometimes you just have to drop off some baggage and move on,” he said. The bond markets seem to agree. There has been no flicker of contagion to Italy and Spain, or even to Portugal, the country deemed most at risk. Continue Reading>>>

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