Merkel to Tsipras: Go Ahead, Greece, Jump!

By Kaj Leers

Faced with a popular Greek opposition party, Syriza, which demands that Europe either reduce Greece's debts or watch Greece walk out of the eurozone, German Chancellor Angela Merkel has not blinked. By declaring that the rest of Europe can get by without Greece, Germany has neutralized the bargaining position Syriza hoped for.

It was a nice try, but Greece's creditors - in the main, the governments of northern European Union countries, the IMF and the World Bank - are unfazed by Greek threats.

Syriza's threats are somewhat akin to those of a suicide jumper standing on a ledge, threatening to jump unless he is paid. In this case, had he threatened to jump three years ago, he would have taken many financial backers with him.

There are still creditors tied to Greece now, but they have changed. Greece's creditors are governments and international organizations, and not banks and pension funds, nor companies whose downfall would immediately affect millions of citizens in predominantly northern European countries - the more powerful of the lot, and the ones holding the EU purse strings.

Because no, all that aid was never about altruism. The money that went to Greece in the past years did not end up in the pockets of Yannis the Athenian sausage seller or Adonia the Cretan consumer. The rescue operation was a huge bailout - but in the form of quick money that was used to pay off Greek debts to German, French, and Dutch financial institutions. Not Yannis and Adiona, but traders and investors like Rodney in London, Charles in Paris, Pieter in Amsterdam and Gerhardt in Frankfurt were saved. And with them their economies, and with their economies, the political futures of the parties in power at the time.

For a time, Greece had to be kept talking on the ledge while Merkel and her firemen brought the assets of their national champions to safety. At the beginning of the crisis, a Greek default would have seen banks and pension funds in the tank, resulting in renewed panic on financial markets still reeling from the credit crisis. Now the risk of contagion - with banks in Italy, Spain, and Ireland crashing like dominoes stones as investors flee - has largely subsided.

Instead, Greece now owes billions of euros to EU countries, the IMF, and the World Bank, among others. Unlike banks, these creditors do not easily default. The hit they would take would be one they could bear. Meanwhile, a default and an exit from the European Union wouldn't help Greece at all.

Let's entertain for a moment the notion that Greece would exit the eurozone, and thus automatically the European Union. (The legalese on this is murky but legal experts agree an automatic exit would be triggered.)

The first thing Greece would have to do is organize stringent capital controls to prevent Greeks from moving their euros to other countries, which would effectively end any economic activity still going on in the country.

Second, Athens would have to quickly introduce a new currency - the New Drachma, say - which would immediately crash against the other main currencies.

For Greek bonds, a new level below junk status would have to be invented. Within 24 hours Greece would be a financial pariah, paying huge interest rates and risk premiums, while its existing loans would balloon, as most loans outstanding to its foreign creditors would still have to be paid in euros. Greece would be Europe's Zimbabwe, with the local economy in tatters; rampant inflation; and mass unemployment, very likely even worse than it stands today.

So Syriza leader Alexis Tsipras stood on the ledge - and bluffed. Merkel folded her arms, smiled told him to go ahead and jump. Bluff called. Tsipras and his party may seem destined to win the upcoming Greek elections, but Tsipras knows he's staring down an abyss much deeper than before.

And so Tsipras decided to stay on the ledge a little longer. Now Merkel wonders whether Tsipras understands that he may call himself Greece's new prime minister after Jan. 25, but he still won't be the one holding any power.

Read more here: www.realclearworld.com/blog/20…