INSIGHT-Europe treads a thin line on Greece
* Greece to vote in second election on June 17
* Europe seeks a delicate balance ahead of the polls
* EU wants pro-bailout parties to win, but can't meddle
* Soft influence quietly being brought to bear
By Luke Baker
BRUSSELS, May 29 (Reuters) - Two weeks ago, Herman Van Rompuy and Jose Manuel Barroso, the European Union's top two officials, met for lunch in Van Rompuy's offices to discuss the deteriorating situation in Greece. Their immediate concern was an uncompromising letter.
On May 10, Alexis Tsipras, the 37-year-old leader of Greece's far-left SYRIZA coalition, had written to them to say that the 130-billion-euro bailout agreed between Greece and the EU/IMF was illegitimate and could not be honoured.
Since SYRIZA had come second in Greece's May 6 election, a better result than expected, Tsipras's threat could not be ignored. Some opinion polls were already suggesting he could win a second election, scheduled for June 17, an outcome that would shunt Greece closer to a possible exit from the euro zone.
In talks that spanned a range of issues, Van Rompuy and Barroso discussed whether to respond to the two-page missive.
Sources present said Barroso initially proposed replying, but Van Rompuy was more cautious, concerned that whatever they wrote would be leaked, ran the risk of playing into Tsipras's hands, and that in any case they should not get into the game of replying to every letter they receive from a party leader.
"It was an open discussion and valid points were made on both sides," said an official familiar with the meeting.
Ultimately it was decided that they would not reply and none has been sent.
But the episode illustrates the delicate balance Europe's leaders are trying to keep between engaging in - or even influencing - Greece's political process and standing back to let it run its course, no matter what the consequences may be.
Get too involved and the EU runs the risk of being seen to meddle in Greek democracy, an interference that could turn frustrated voters ever more firmly against Europe and its institutions, exacerbating an already precarious situation.
Maintain too much distance and leaders might be accused of fiddling while Athens burns - allowing the country to slide towards a fate that could include departure from the euro and the European Union, with vast and unpredictable repercussions for everyone involved in the 50-year European project.
A dramatic example of the risk of being seen to be too involved came in a phone call German Chancellor Angela Merkel held with Greek President Karolos Papoulias on May 18.
A Greek government spokesman said after the call that Merkel had "relayed ... thoughts" about Greece holding a referendum on its euro zone membership, a suggestion that provoked outrage in the Greek media and inflamed anti-German sentiment.
Merkel's spokeswoman later denied reports she had urged Greece to hold a referendum, but the damage was done - Europe's most powerful leader was seen to have overstepped.
"There is no rulebook for how you do this," said the Europe minister of a small euro zone state, acknowledging the difficulty of trying to influence without getting too involved.
"You feel a responsibility to make sure that Greek voters and Greek party leaders understand the consequences of their actions, but you can't dictate to a democracy - and certainly not in the current circumstances."
For now, the views of Greek voters seem to be trending in the direction European leaders would like, whether as a result of quiet outside pressure or the realisation that a vote for the far-left really could mean an exit from the euro, a currency that the vast majority of Greeks like and want to keep.
Whereas two weeks ago opinion polls suggested Tsipras's SYRIZA could win the June 17 election outright, with up to 30 percent of the vote, the latest surveys suggest a pro-bailout party, New Democracy, is favourite.
The result remains too close to call, but with New Democracy seen winning 26-28 percent of the vote and SYRIZA 20-26 percent, there are growing expectations that a pro-bailout party will be given the first mandate to try to form a coalition.
Yet that would effectively mean a repeat of the May 6 election, with New Democracy winning and SYRIZA coming second, leading to more political uncertainty, especially if SYRIZA sticks to its commitment to tear up or renegotiate the bailout, something the EU and IMF will not countenance.
For Europe's leaders, therefore, it remains necessary over the next 2-1/2 weeks to quietly cajole the Greek public towards backing pro-bailout parties without explicitly saying so. The message is: if you want the euro, back the bailout.
"We want Greece to stay in the euro but meet its commitments and that's a decision that's up to the Greeks," German Finance Minister Wolfgang Schaeuble said on May 18.
Van Rompuy echoed that message in a speech on Sunday in Cyprus, as close to Greece as he could get without visiting it.
"Greece must remain in the euro area while respecting its commitments. We expect that after the elections, the next Greek government will make that choice," the European Council president told Cypriot parliamentarians. "The stakes are high - for you as neighbours with close links to its financial system, but also for all of us in the euro zone."
Van Rompuy wasn't overstating the stakes - if Greece were to leave the euro, it would default on up to 300 billion euros of foreign debt, the vast majority owed to euro zone countries. That would have a profound knock-on impact on banks and economies across the region, and Tsipras knows it.
In what has become akin to a game of chicken, the SYRIZA leader appears to be calculating that Europe will do everything to keep Greece in the euro, including perhaps softening the terms of the bailout, for fear of the consequences if it leaves.
For their part, euro zone countries have made clear how serious they are about the risk Greece is running - all 17 were told last week to prepare contingency plans for Greece leaving the single currency bloc.
As well as Merkel's referendum discomfort, IMF director Christine Lagarde has learnt the risk of being seen to meddle.
In an interview with Britain's Guardian newspaper last week, she assailed Greeks for not paying enough taxes and said she was more worried about the fate of poor countries in Africa. The comments did little to win her or the IMF popularity among Greeks and may even influence how some decide to vote.
But it is not just those views that EU leaders must try to hold in check ahead of June 17 - there is also pressure from inside Greece to be more outspoken, and that can backfire too.
In an interview with Italian television on May 11, Barroso, the president of the European Commission, was asked what he thought of Tsipras's plans to tear up the bailout agreement.
"Look," he said, "if a member of a club does not respect the rules, it's better that it leaves the club, and this is true for any organisation or institution or any project."
Even though he did not name the country, his comments were taken as referring to Greece and made it look as if a Greek exit from the euro was drawing closer. Financial markets were thrown into panic, Greeks were outraged and Barroso was criticised.
But what was particularly galling about the incident for Barroso was that he had never intended to make such a strong statement. He did so only because he got a call from Greece's caretaker prime minister, Lucas Papademos, asking him to do so, a Commission official said.
Frustrated at the failing efforts to form a coalition after the May 6 election, Papademos wanted Barroso to say something strong in the hope it might wake Greece's political leaders up.
"It wasn't Barroso's initiative. It was a direct request," said the Commission official informed of the sequence of events, adding with a degree of understatement: "It didn't work."
Leaders will be hoping a quieter form of pressure might.