By Hugo Dixon
Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
There are two schools of thought about how the euro zone should play its negotiations with Alexis Tsipras, the new Greek prime minister. One is that other leaders and the European Central Bank should back him into a corner. The other is that they should give the radical left Syriza leader time.
Matteo Renzi’s position has been strengthened by Italy’s presidential election. The prime minister persuaded the electoral college, made up mainly of parliamentarians, to choose Sergio Mattarella – against the wishes of Silvio Berlusconi, the media magnate, former prime minister and up to now Renzi’s quasi-partner.
A possible bank run is Greece’s Achilles’ heel.
The country probably won’t be forced out of the euro. But there is a scenario where this could happen. This involves Syriza, the radical-left party, winning the upcoming election and then running out of time before it can perform the policy U-turn necessary to keep its creditors on side. Depositors might then panic.
Matteo Renzi’s Plan A is to push through domestic reforms, hope the European Central Bank manages to get inflation ticking up, and keep his fingers crossed the Italian economy stops shrinking. But if this fails, a mega wealth tax, debt restructuring and/or exit from the euro beckons.