For Merkel and Tsipras, a deal could be dangerous

By Matthew Karnitschnig

Greece's latest offer appears to be more acceptable to creditors — but can it be sold in Berlin and Athens?

As Angela Merkel and Alexis Tsipras head to Brussels this weekend in a final push to save Greece from financial collapse, success may carry a greater political risk for the pair than failure.
Even as the two leaders have stressed the importance of reaching a deal, their own political camps are more polarized than ever.
Greece submitted its reform plan to Europe late Thursday ahead of a weekend summit where leaders will decide whether to extend more aid. Following the failure of previous rounds of talks, Athens worked closely with France to craft its latest proposal, which appeared to be closer to the expectations of creditors. Greece is requesting €53.5 billion and a debt “reprofiling,” euphemism for forgiveness. In return it would accept most of its creditors conditions. Unless there’s an agreement, Greece’s banking system will implode and the country would likely abandon the euro.
After months of often caustic negotiations, culminating in the collapse of talks two weeks ago, selling the deal will depend more on winning back trust than the details of Greece’s value added tax regime or how Greece will fund its pension system.
In Germany, conservatives among Merkel’s Christian Democrats, including Wolfgang Schäuble, simply don’t believe Athens has the will to implement a new program of reforms.
“How confidence-building measures can materialize between now and midnight on Sunday strains my imagination,” the sharp-tongued German finance minister told a conference in Frankfurt on Thursday.
Schäuble told the crowd that he joked in a recent conversation with U.S. Treasury Secretary Jacob Lew that the eurozone would take on debt-laden Puerto Rico if Greece could adopt the dollar.
Schäuble also said he had encouraged his Greek counterpart, Euclid Tsakalotos, to push some reforms through parliament this week, telling him to “just do it.“ So far, Schäuble said he has seen no progress.
The fundamentalist faction of Tsipras’ Syriza party, led by Energy Minister Panagiotis Lafanzanis, is no less severe.
“We don’t want add to the past two failed bailouts a third bailout of tough austerity which will not give any prospects for the country,” Lafazanis said on Thursday in Athens.
Buoyed by Greeks’ overwhelming condemnation in Sunday’s referendum of German-sponsored austerity, Syriza’s left wing sees little reason to back down. Indeed, many Syriza faithful believe accepting the creditor terms would amount to a betrayal of the popular will.
Sunday’s result hardened German conservatives’ resolve as well. For them, it’s Europe’s rigid rescue framework that’s at stake. Giving Greece another bailout would mean abandoning the eurozone’s fiscal principles and inflict more long-term damage on the currency than letting Greece go, they argue.
Some conservatives even argue that kicking Greece out would serve as a warning to other laggards, thus encouraging countries to abide by the rules and bolstering confidence in the euro’s stability.
Resistance to a deal in both camps is so strong that neither Merkel nor Tsipras has any hope of winning over the renegade factions with the power of argument.
Instead, they’ll have to meet the resistance head on and try to ram an agreement through their parliaments.
Tsipras could have the most to lose.
Syriza, a Greek acronym for “coalition of the radical left,” evolved from a patchwork of Marxist, socialist and other left-wing groupings. Though Tsispras united the party and led them into government, he has yet to test the loyalty of his base. Agreeing to further austerity would be such a test, however.
In recent days, he has reached out to opposition parties, even offering them a glimpse of Greece’s proposal. Some see the overtures as a tactical move. If enough Syriza MP’s refuse to endorse a new bailout package, Tsipras would be forced to seek opposition support.
Some Greek political watchers say the vote could even trigger Syriza’s breakup, forcing Tsipras to build a new coalition or call new elections.
“The party is split between a pro-Europe and anti-Europe factions and somehow they need to fix that problem,” said George Prokopakis, the former president of Greek state television.
Merkel’s challenge is no less daunting. When the Bundestag voted in February to extend Greece’s second bailout through June, 29 of 311 conservative MP’s voted against the measure, a small, if vocal minority.
The problem for Merkel is that the resistance to a third bailout has grown.
In the past, Merkel has argued that the rescues were in Europe’s best interest. In 2012, when Greece received the last bailout, she convinced a skeptical Schäuble to go along. Back then, he played a key role in selling the deal to MPs. But his harsh rhetoric in recent days suggest he may not be willing to do so again.
Merkel likely has enough support to bring her party into line, but not without a bruising debate.
A bigger issue is the German public. A majority of Germans opposes further aid. So far, neither Merkel nor the Social Democrats, who govern in a grand coalition with her party, have tried to convince them otherwise.
Allowing Greece to simply fall out of the euro would likely win her points at home, at least in the short term. But voters may also hold her accountable for the failure of Greece’s previous bailouts and ask uncomfortable questions about the €90 billion Germany has put at stake to fund them.
Merkel may be more worried about history’s verdict. Some argue that this is the perfect moment to push Greece out. The market reaction to the crisis has been mild so far and a number of other capitals would support it.
But in the past, Merkel has shied from the risk. Even if the markets are calm now, a Grexit would show that euro membership is reversible. That’s a potentially dangerous precedent for vulnerable countries such as Portugal and Ireland.
Unlike Schäuble who looks at Greece mainly in terms of its impact on the integrity of the eurozone, Merkel is more focused on geopolitical aspects of a Greek exit.
In recent days, the U.S. has upped the pressure on European and Germany to find a solution, with both President Barack Obama and Treasury Secretary Lew personally intervening.
Washington is concerned about the impact Grexit could have on the broader region. Greece is a member of NATO and a key ally in an unstable neighborhood.
Beyond the near-term consequences of letting Greece out of the euro, Merkel also has to consider her legacy. Grexit could lead to further turmoil in Europe, possibly causing it to unravel, some prominent Europeans warn.
“Things have been allowed to escalate to such an extent that Europe could fall apart,” Günther Verheugen, Germany’s former EU commissioner, said this week.