The Greek Gambit

Alex Tsipras has a message for those who think he wants Greece out of the eurozone: “It is not something we desire, it is not something we are seeking.”

That may seem a giant U-turn for the head of Syriza, who only just claimed Greece’s voters gave him a mandate to cancel Greece’s bailouts. To us though, it’s likely plain old politicking. The first election was a protest vote. Two years of public sector cuts have worn on Greeks, and many sought to punish the parties implementing them. But many see the second election as a referendum on euro membership, which over 75% of Greeks favor, and recent polls suggest pro-bailout, pro-euro New Democracy and Pasok would win a combined majority on June 17. Thus, it seems Tsipras is trying to curry pro-euro favor and claw back votes.

His new strategy: Betting that Greek voters don’t want to reject the euro or socialism. He still objects to the bailout terms, but now he’s arguing only his program can keep Greece in the euro. As he toldThe Wall Street Journal: “It’s a contradiction to think the policies of the [Greek bailout agreement] and keeping Greece in the euro zone can go together. It’s the [policies] that would lead to the collapse of Greece and its possible exit from the euro zone.”

Essentially, it seems he’s trying to shift the conversation from the euro, a battle he was losing, to a battle he thinks he can win: One between (relatively) supply-side reform and demand-side stimulus. Under current bailout terms, Greece is taking some supply-side tactics—trim the public sector, liberalize markets and tear down barriers to productivity. Over time, that’s probably Greece’s (and peripheral Europe’s) best bet. It helps the economy become more competitive, laying the foundation for more sustainable long-term growth. But the required public-sector job, wage and pension cuts can cause painful short-term dislocations, which Greeks have borne the brunt of for two years. Tsipras posits this short-term pain will break Greece before the long-term benefits materialize (not that he thinks they ever would—radical leftists aren’t known for faith in the private sector). To him, renewed public spending, courtesy of the EU, is the only solution.

This gambit only works if Brussels ponies up, so Tsipras’s comments serve a second purpose: Playing a bit of chicken with EU and IMF officials, on the assumption core Europe’s will to preserve the euro will outweigh some officials’ objections to funding public projects. His first attempt, rendering the bailout null and void, failed when EU leaders called his bluff. So now he’s tipping his hand a bit, reminding leaders of the worst that could happen if Greece stops paying creditors—raising the specter of a eurozone collapse, then acting the pragmatist, suggesting they compromise on a “European solution” before that happens.

That compromise, it appears, is already starting. Italian Prime Minister Mario Monti predicted “an equilibrium will be found,” suggesting leaders will agree on Greek stimulus to complement, though not replace, previously agreed-to reforms. EU diplomats agreed on a €230 million pilot program for “project bonds,” backed by member states, to fund cross-border energy, transport and communication infrastructure projects. Some think that’s the gateway to full-fledged Eurobonds, which could introduce further stimulus spending. Leaders are also negotiating adding €10 billion to the European Investment Bank’s infrastructure outlays. Germany, Sweden and Austria haven’t agreed yet, but if this becomes make-or-break for the euro, compromise seems likely.

Other concessions are possible, too. Perhaps EU leaders give Greece an extension on those €11.5 billion in budget cuts due by June’s end. Maybe they let Greece delay implementing some cuts already agreed to. The bailout agreement isn’t a treaty or law—it’s a letter of intent signed by Greek leaders, and letters can be rewritten.

And Tsipras, if elected, could moderate. If he must choose between socialism and the potential chaos of a Greek euro exit and bankruptcy, it’s hard to see him abandoning any bailout terms the EU won’t renegotiate. Especially if he gets his stimulus wish.

That said, it’s premature to handicap the election result—polls change daily, and campaign rhetoric is evolving. But the apparent drive for compromise suggests a Greek eurozone exit isn’t automatic if bailout-friendly parties don’t win.