Neil MacKinnon of VTB Capital -

Analysts and commentators are currently in furious disagreement over who has the upper hand in the EU’s negotiations with Greece. Syriza may yet be forced into the total capitulation dreamt of by conservative journalists and politicians. But it would be foolish to assume the negotiations are a zero-sum game: twist Syriza’s arm far enough and the EU wins.

This ignores the practical fact of democracy. In what was essentially a single-issue election, Syriza received a very specific mandate from the people: scrap the austerity policies imposed by the troika. The Greeks have already shown their ability to throw out a government they saw as being in league with Brussels. They may do so again.

The prospect of further political chaos in Greece should worry Angela Merkel and her colleagues in Berlin. They must despise Syriza. It used the troika as a political punch bag in its march to electoral success, demonising every aspect of the bailout agreement reached under Antonis Samaras. Its deeply principled, emotionally charged arguments are anathema to the cold, practical logic that reigns in Brussels. Yet the EU needs a stable government in Greece to implement whatever programme of reforms is decided. If it performs too strongly in negotiations with Syriza, it may find itself without a negotiating partner at all.

This has implications beyond Greece. The buzzword in Brussels circles has long been “political contagion”. This is the idea that, if Syriza gets what it wants, it will trigger a chain reaction around other indebted Eurozone countries such as Spain and Portugal. Copycat parties – already waiting in the wings in the case of Spain’s Podemos – will storm into government demanding the renegotiation of their respective bailout agreements on more generous terms.

Little thought has been given to the prospect of political contagion if Syriza does not get what it wants.

Discussion would then turn to the nuclear option: ‘Grexit’. This is not as fanciful as it may seem. Greece might decide that life outside the euro is preferable to decades of austerity within it. Being outside the monetary union, however unpredictable, could not be much more of a disaster than being in one has proven. At least Greece would be in control of its own destiny. Through a severe currency devaluation and the ability to set their own economic policies, the probability of an economic recovery would likely increase.

Moreover, for some debt hawks in Germany, a Grexit is preferable to any concession on the Greek bailout terms, no matter how trivial. In their view, monetary union would be stronger without Greece anyway. The prospects of a short-term financial crisis caused by Greek exit seem much more remote than in 2010: witness the muted impact on Eurozone debt and equity markets of the EU-Greek discussions.

However, a Grexit carries its own risk of political contagion. There is an impending series of elections in key European states: Portugal in September, followed by Spain in December and Ireland next March (not to mention the UK in less than three months’ time). The rise of anti-Brussels parties in all of these countries could threaten the viability of the euro. For these parties, the basis on which the euro was conceived – as a union of equals – has been fundamentally undermined. There is no union of equals if Germany and the core northern bloc get to set the rules that decide who can participate in monetary union and who cannot. More importantly, there is no union of equals if the division between creditors and debtors becomes permanent, and the European periphery is reduced to what George Soros called a “depressed hinterland” in need of constant transfer payments.

This does not mean the troika should hand Syriza a generous deal in order to keep Greece in the euro. But it does mean that Eurozone finance ministers need to do more than convince Syriza of the need to stick to the terms of the original bailout deal. The troika needs to speak directly to the Greek people – and those of Spain, Portugal and Ireland – and convince them that they have a vision for the Eurozone that includes them as equals, not serfs.

Neil MacKinnon is VTB Capital’s Global Macro Strategist