Greece political crisis becoming a war of wills

ATHENS — As Greece lurches along without a government, its deepening political crisis is fast turning into a war of wills in which Europe’s economy potentially hangs in the balance.

On one side are the Greek politicians who accuse other Europeans of trying to “terrorize” their country into accepting more draconian austerity cuts and who warn that if Greece gets kicked out of the euro, “Europe will be doomed.”

On the other are officials in Brussels, Berlin and other capitals, who say that expelling Greece from the Eurozone would be regrettable but “can be managed” if Athens reneges on the tough terms to which it has agreed in exchange for two international bailouts.

Only one of the antagonists can be right. The outcome of the high-stakes staring contest could determine whether Greece becomes the first European nation to default in decades and possibly pulls neighboring countries down with it, in a cascade whose waves would crash through the global economy.

Which side will prevail, nobody can predict. Even London’s famous bookies have stopped taking bets on whether Greece will remain a member of the Eurozone, the club of 17 nations that use the euro. But as Athens hurtles toward another possible election next month to try to break the impasse created by this month’s inconclusive vote, neither side is showing any sign of backing down.

The May 6 election saw Greeks spurn their two traditional powerhouse parties in favor of fringe groups campaigning for an end to austerity. On Monday, talks to try to cobble together a coalition government came up short, with President Karolos Papoulias calling for another attempt Tuesday, perhaps with the aim of forming a nonpartisan administration of technocrats.

The man many either applaud or curse for blocking a deal, Alexis Tsipras of the hard-left Syriza party, is also the brash young leader whose pledge to rip up the bailout agreements has raised the political temperature across Europe.

A handsome, motorcycle-riding 37-year-old who cultivates a rebel image, Tsipras is adamant that Greece can abandon its commitments to international lenders and reverse the brutal austerity policies of recent years yet still remain in the Eurozone and keep on borrowing, despite warnings from European officials that those are irreconcilable goals.

Tsipras’ argument is winning over many of his compatriots, the majority of whom say they want their government to preserve Greece’s place in the euro community yet reject austerity as the price of it. Polls in recent days have shown support for Syriza rising, with voters shrugging off the strong rhetoric out of Germany and other nations. The party is now on track to improve on its surprise second-place finish May 6 and draw the most votes in next month’s balloting, though not enough to control Parliament outright.

Christos Staikos, a senior Syriza official, dismissed European officials’ threat of a euro expulsion as a “pseudo-dilemma intended to terrorize” Greeks into acquiescing to further belt-tightening. His party says that a better solution is for Athens to cancel the bailout packages and renegotiate less onerous ones, including another deal to forgive some of the country’s crippling debt.

“When you go to the bank and ask to remortgage your home loan, does the bank kick you out? No, because it needs you as a customer, and it wants to collect money owed,” Staikos said. “We’re in the exact same situation.”

In any case, the treaty that set up the Eurozone contains no provision for a member nation leaving it. Forcing Greece to go would set off a catastrophic chain reaction, Staikos warned, with investors pulling out of other financially weak nations such as Spain and Portugal, which would then have no choice but to follow Greece out the door.

“Legally they can’t” expel us, Staikos said. “And we don’t believe it will come to that, because the cost of a Greek exit will be catastrophic for the European project as a whole. If Greece goes … Europe will be doomed.”

But the retort from other parts of the continent is: Don’t be so sure, and don’t get too big for your britches.

In an unusual flurry of comments from a normally taciturn bunch, the governors of various central banks in Europe have come out in the last few days with statements that the region would weather the storm of a Greek departure from the euro just fine. Other high-profile European politicians have made the same point.

While unwanted, a Greek exit is “not necessarily fatal,” Patrick Honohan, the head ofIreland’scentral bank, said Saturday.

Had it happened two years ago, it might have triggered a so-called credit event with disastrous results, as happened with the collapse of Lehman Bros. in 2008, but Europe has since put in firebreaks to prevent the damage from spreading, Honohan and other European officials say. For example, a permanent European bailout fund has been created that could help prop up other ailing nations, though many analysts question whether the fund is big enough.

Greece, by contrast, would struggle to keep depositors from fleeing with their euros if it reverted to the drachma, its former currency. Business contracts would be thrown into chaos and Athens could be shut out from borrowing on the open market for years, which would only worsen its troubles.

“The consequences for Greece would be more serious than for the rest of the Eurozone,” said Jens Weidemann, the head of Germany’s central bank.

Still, independent experts warn that other European nations shouldn’t be too sanguine about their ability to contain the fallout of a Greek euro exit and subsequent default. Fears of a bad end to the current crisis sent European stock markets tumbling Monday, while borrowing costs for Spain edged up.

“The best thing Greece can do for its own survival and for the survival of European economic and monetary union … is to form a government as soon as possible and say as soon as possible” that it will honor the bailout agreements, said Jose Manuel Garcia-Margallo, the Spanish foreign minister.

Tsipras and his party believe that public opinion is on their side, and not just in Greece. Staikos, the Syriza official, said the dynamic in Europe is changing, with the fall of a pro-austerity government in the Netherlands and the election of socialist Francois Hollande as president of France. German Chancellor Angela Merkel and her insistence on belt-tightening as the answer to Europe’s debt crisis is becoming increasingly isolated.

If Greece holds a new election, most likely on June 17, a stronger finish for Syriza could actually work in favor of a compromise solution, said Pieter Cleppe, head of the Brussels office of the think tank Open Europe.

“I think in the end they’ll come to an agreement,” he said. “When Syriza will be strengthened enough, they’ll politically be able to do some concessions.... The Eurozone will also do some concessions.”

And it if comes to a full-on showdown, Cleppe thinks it’ll be the rest of Europe that blinks first, though there’s no way to say for sure.

“I don’t think they have the stomach” to kick Greece out of the Eurozone, he said. “I think they’re too afraid. But I might well be dead wrong.”

henry.chu@latimes.com

Times staff writer Chu reported from London and special correspondent Carassava from Athens.