Why Everybody’s in the Dark on Greece

Does Alexis Tsipras actually want to keep Greece in the eurozone?

By SIMON NIXON

June 14, 2015 7:41 p.m. ET

7 COMMENTS

Does Alexis Tsipras actually want to keep Greece in the eurozone?

Until recently, the answer seemed clear. The Greek prime minister fought an election promising to keep Greece in the single currency. Every survey of Greek voters showed strong support for euro membership. No one seriously doubts that a euro exit would be catastrophic for the Greek economy in the short term—and most likely in the long term too, given the potential for social and political turmoil. Sure, his Syriza party has been anti-euro as recently as 2012 and some of its leading figures have continued to argue for exit, but the bulk of the party seemed to have reconciled itself to membership.

Eurozone policy makers certainly always assumed that Mr. Tsipras was negotiating in good faith. They believed this even as he campaigned on a platform of tearing up the terms of the country’s bailout deal and reversing many of the key reforms; they continued to believe it even when he shunned the possibility of coalition with the centrist pro-euro To Potami party in favour of an alliance with the right-wing nationalist euro-skeptic Independent Greeks. They even kept their faith after he was elected when he provocatively began to follow through on campaign pledges to hire back sacked civil servants, cancel privatizations and make unfunded fiscal handouts.

But now Greece’s creditors are starting to wonder whether they misread his intentions all along. Last week, it was widely reported that talks between the two sides had broken down when the International Monetary Fund withdrew its negotiating team from Brussels. In fact, the negotiations broke down long before. The IMF had quietly pulled its team a week earlier after it had spent a futile week in Brussels doing nothing—only for its members to return to Brussels after spending little more than 24 hours back in Washington, D.C. Athens had decided it was ready to resume negotiations, but the team was left twiddling its thumbs for a further week.

Greece’s creditors now say they don’t know what Mr. Tsipras wants—or more crucially what he can deliver. It may be that he doesn’t know himself.

The kind of eurozone to which Syriza wishes to belong is one that doesn’t exist—but which many in Syriza clearly hoped their arrival on the European political scene would help bring about: a eurozone in which Greece would be free to pursue whatever economic strategy it wished, unencumbered by much of the debt that it currently owes to the rest of the eurozone. Athens has convinced itself that all that stands between the grim present and a glorious economic renaissance is debt relief, thereby allowing it to regain access to financial markets to fund a Keynesian public-spending-led growth strategy.

How this eurozone should work in practice has never been made clear. Granting Greece large-scale debt relief with minimal conditions would turn the eurozone into a transfer union. In theory, the eurozone might work better and Greece might be better off if the eurozone were a transfer union. But it isn’t a transfer union and there is no political appetite in much of the currency bloc to turn it into one. Besides, even a transfer union needs rules and institutions to protect taxpayers from moral hazard. That, in turn, requires a much greater degree of political union and fiscal oversight, which is hard to reconcile with Syriza’s demands for maximum political sovereignty.

More important, Greece’s creditors reject the idea that debt relief is a sufficient condition to put the economy on a sustainable footing or even to restore market access. After all, Greece was able to issue bonds in 2014 even though nominal debt was high and only lost market access when it became clear that Athens was intent on abandoning its bailout program, raising doubts about future growth and undermining the recovery.

It is striking that in his many critiques of eurozone policies, Greek Finance Minister Yanis Varoufakis has had little to say on what transfers of political sovereignty might be needed to make a transfer union viable—or how this might be compatible with Syriza’s demands for maximum national sovereignty.

More importantly, Greece’s creditors reject the idea that debt relief is a sufficient condition to put the country’s economy back on a sustainable path. No one disputes that some restructuring of Greece’s debt is now going to be needed as a consequence of the disaster that has befallen the Greek economy since Syriza triggered a political crisis last December when it refused to allow the election of a new Greek president. The creditors have already agreed to lower Greece’s budget targets. They have also told Mr. Tsipras that once the two sides have agreed on a package of reforms and new fiscal targets, they will also discuss broader debt relief as part of a comprehensive future program. The IMF also insists it will take a hardline if necessary with the eurozone to ensure Greece’s debts are sustainable.

But Greece’s creditors are adamant that there is little point talking about debt relief until Athens has agreed on a package of reforms to put Greece’s public finances on a sustainable footing. For the creditors, the point of these reforms isn't to pile austerity onto an already weak economy but to rebalance the economy away from unsustainable models to ease the pressure on the productive parts of the economy. On this analysis, the reforms to the pension and tax system at the heart of the current impasse would be needed regardless of what deficit target was chosen. For some of Greece’s creditors, the deficit targets are much less important than the quality of the policies that underpin them.

For the creditors, the test of whether Mr. Tsipras really wants Greece to remain in the eurozone comes down to a simple question: Is Syriza willing or able to reform Greece’s public sector? It was the vast expansion of this public sector that caused the crisis and it is the failure of successive governments to tackle the issue that has prolonged the drama.

Although public-sector numbers have been slashed, very few jobs were lost via redundancies: Most were shed via generous early retirement programs that now weigh on the pension system and are crippling the public finances. Meanwhile, Syriza has vowed to protect existing public-sector jobs, salaries and working conditions.

For six years, Greece’s private sector has paid a crushingly high price for this indulgence of public-sector vested interests in the form of jobs lost, jobs never won and excessive tax. Mr. Tsipras may have hoped to transfer this cost to the rest of the eurozone.

But that isn’t the kind of currency union Greece joined. He must choose between keeping Greece in the eurozone and preserving public-sector privileges. He can’t do both.

Write to Simon Nixon at simon.nixon@wsj.com