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'Drachmageddon' averted but euro gamble drags on

Greece, like Ireland, is discovering there's little reward from the eurozone for good behaviour, writes Pat Cradock

Remember the Fiscal Treaty that was supposed to bring stability to the eurozone? A German idea, but the Germans have not ratified it yet. The eurozone seems more ready than ever to fall apart. The treaty has done nothing to stabilise the situation, a clear demonstration of its complete irrelevance in the present crisis.

It is only a few weeks but the referendum on the treaty seems so long ago. The truth is that the Fiscal Treaty was a side show and the Irish vote on it even more so.

When our leader reported to Angela Merkel he received dutiful praise but short shrift when he sought a quid pro quo on debt for delivering the Yes vote. Unfortunately he ignored a basic rule of economic relations -- put in your bribe request before you perform the service.

The main concern of the Yes voters appears to have been that funding would not be available from the European Security Mechanism if the Fiscal Treaty was not ratified -- as stated in the text of the two treaties.

Let's be straight about this: our Government was responsible for this blackmail. The Germans may have thought it up but the Irish Government was a party to it.

In the Greek election campaign, fear was similarly brought to bear by the eurozone leaders, the fear that Greece would be ejected from the euro if the parties supporting the bailout did not win the election.

The leader of the principal pro-bailout party New Democracy, Antonis Samaras, proclaimed his adherence to the euro, while announcing his intention of renegotiating the bailout. He claimed his main rival Alexis Tsipras of Syriza, the Radical Left Coalition, would precipitate a return to Greece's former currency, the drachma, if he scrapped the bailout as he pledged.

The disaster this would represent was painted in lurid colours and the word 'drachmageddon' coined for it. Of course, nobody knew exactly what a reintroduction of the old currency would involve and the figures produced for the drop in living standards etc were entirely speculative.

For his part, Tsipras said he had no intention of exiting the euro, adding the Germans had too much at stake and would not throw Greece out.

Whereas the electoral debate in Greece focussed on the bailout, the 'euro vs drachma' choice dominated the international media coverage. The eurozone leaders repeated the mantra that Greece had to honour its commitments to stay in the euro, which ignored the reality of the economic situation in Greece.

Dr Merkel is reported to have phoned the Greek president and suggested that a referendum be held on staying in the euro. This was subsequently played down but it was ironic to say the least that the idea was mentioned at all, seeing that she and Nicolas Sarkozy had forced former prime minister George Papandreou out of office for making the same proposal some months earlier.

On the weekend of the election, the German daily Die Welt, idelogically close to Merkel's CDU party and well-informed about party thinking, spilled the beans, reporting that the evaluation of Merkel's office was that it would be too risky to eject Greece from the euro.

It seems the eurozone is the new Hotel California -- in the words of the song: "You can check out any time you like but you can never leave."

Apart from the fear of its impact on other eurozone countries, the Greek state is estimated to owe €90bn to Germany, including money owed to the Bundesbank under the arrangements between the central banks. So the whole thing seems to have been a gigantic bluff and the analysis of Tsipras to have been fundamentally correct.

As regards the second plank of his programme, the renegotiation of the bailout, Samaras got little or no encouragement from Brussels or Berlin. Speaking to a CDU convention in Hesse just before the election, Dr Merkel categorically ruled out any change to the bailout agreement, to loud applause from the assembled Hessians. She made a similar statement at the G7 meeting in Mexico.

Here again, Tsipras seems to have been correct in thinking that the best way to get shut of the bailout was to unilaterally cease to implement it.

So where are we now after the election? New Democracy has retained its position as first party and therefore picks up the bonus of 50 seats that go with that position, an arrangement to ensure strong one-party government -- no joke intended. However, with a little under 30 per cent it came in just two and a half per cent ahead of Syriza.

A coalition has been cobbled together with Pasok (socialists), the previous government party and a shadow of its former self with 12 per cent, together with a smaller party, Democratic Left. The two parties have reportedly decided not to nominate members to Cabinet. Samaras has been sworn in as prime minister, fulfilling a long-held ambition. It looks anything but a strong government.

Any idea that the formation of the government represents a ringing endorsement of the bailout would be wide of the mark. The pro-bailout parties got only 42 per cent between then. A conclusion in Berlin and Brussels that there will be a reversion to business as usual would be delusional.

Under the bailout agreed in March Greece is supposed to identify by the end of this month additional cuts of more than €11bn in the budgets for 2013/14. How this commitment is handled will provide a pointer to the future of relations with the lenders. Any attempt to revert to further wage cuts and 'internal devaluation' (eurozonic for pauperisation) will inevitably move the conflict back to the streets.

Padraic (Pat) Cradock is a retired Irish ambassador now living in Greece

Sunday Independent