The Eurozone is About Tough Love

Contrary to perceptions in the United States and elsewhere, the Eurozone is not at all about the mindless application of rigorous austerity.

Countries that face problems with their economies can count on one simple rule: Help is available to them in exchange for meeting conditions.

And those conditions are not set in stone, as some ardent Eurozone critics often argue. They can be amended if circumstances change, but – message to Rome and Paris – they cannot be rejected wholesale.

Make no mistake: The political will to stay together and play by the rules is the potential Achilles heel of the Eurozone.

Exiting is your own choice

And realize this: If a country really wanted to leave the euro, neither the ECB nor Berlin could do anything about it. (I do not expect such an accident to happen.)

The new economic setback, stemming from a weakening economic outlook first in Europe and also globally, will hurt some banks. And, crucially, it will delay the point in time when the citizens of Spain, Portugal and Greece will see the full benefits of their unavoidable harsh austerity-cum-reform programs.

This fact of global economic life adds to the political tail risk that one of these countries may elect a populist leader who then makes a full reform U-turn. And yes, such an election could plunge the country in question into a deep crisis and toward potential euro exit.

On the other hand, in a pan-European perspective among business and political elites, the economic setback seems to reinforce the long looked for sense of urgency to deliver reforms in France and Italy. By the same token, the slowdown can also add to a perception in the public at large that reforms are all pain and little gain.

As usual in the Eurozone, we need to watch the politics even more than the economic data. But the euro is much more than just a currency. It is part and parcel of a dense web of intra-European relations that are not easily broken, or only at great costs.

Putin’s war against Ukraine has been another potent reminder of the (non-economic) ties that bind continental Europe together, strengthening the cohesion of the club. I remain confident that the political strains will not get out of hand.

Tough love in action

Tough love, that is the Eurozone promise of support for all those who respect the rules, may not please radical-left opposition leader Alexis Tsipras in Athens.

If he came to power in March 2015 (unlikely, but not impossible), he would face a clear alternative: He would either have to grow up fast (and pursue almost exactly the policies of the current pro-reform government, as he might well do) – or he will go down in history as the man who catapulted Greece out of Europe – and into the Middle East.

In that event, the Eurozone would deploy all its emergency instruments to contain the risks of contagion from Greek economic self-destruction.

But there also is an alternative scenario: Tspiras, once in charge, may not only accept reality – but, as an outsider, actually decide to transform the country. Since he is not a part of the country’s old political, economic and media establishment (and the problematic web that binds it together), he might be in a position to modernize Greece’s outmoded political culture.

To do so, however, he would have to ditch all his fiery rhetoric and turn into a Greek version of Italy’s energetic center-left reformer, Matteo Renzi. Time will tell whether Tsipras can get real.