Merkel’s European dilemma

By Matthew Karnitschnig

The German chancellor has managed to keep the eurozone in line on Greece. Her job just got a lot tougher.

ATHENS — Angela Merkel’s European coalition on Greece may be about to crack.
Ever since Greece’s leftist Syriza party rose to power in January elections, Berlin has managed to keep the eurozone on message, insisting that Athens stick to its obligations, agreeing to only minor concessions.
After Sunday’s referendum and an overwhelming Greek rejection of creditors’ demands, Merkel’s job just got a lot tougher.
Across southern Europe, where governments face many of the same challenges as Greece, from high unemployment to an aging population, Greece’s popular revolt against German-inspired austerity sends a worrying signal to mainstream governments.
In Spain, where the Syriza-inspired Podemos party has made inroads ahead of elections later this year, Mariano Rajoy’s center-right government is particularly eager to defuse Europe’s tensions with Greece. In a shift in tone, Economy Minister Luis de Guindos said Madrid was prepared to consider a third Greek bailout.
“I don’t contemplate in any way Greece leaving the euro,” he said at a news conference Monday.
The Greek government’s confrontational approach to the talks after it came to power made it easier for Merkel to keep everyone on board.
In the first standoff with Greek Prime Minister Alexis Tsipras’s government in February, the eurozone agreed to give Athens more time to negotiate a bailout, but rejected all of their substantive demands. Berlin believed then that it could force Tsipras into submission using the threat of default.
But that strategy didn’t work.
Now, with capital controls in place, it’s unclear how long Greece can survive without a fresh injection of aid. Greek banks will remain closed for at least a few more days and are quickly running out of cash to fill automated teller machines.
Merkel’s dilemma is that she can only sell bailouts at home if they are linked to tough reform agendas. Europe’s entire rescue framework was designed using a German formula that demands austerity for cash.
Germany argues that letting Greece off the hook would invite further abuse and undermine the euro. But critics say Berlin’s punitive approach yields only gradual improvement at the price of social cohesion and European solidarity.
After months of failed attempts to resolve the standoff, the question is how much further they are willing to push.
Yanis Varoufakis, Greece’s controversial finance minister, was forced to step aside Monday, a move he described as an olive branch to Greece’s eurozone partners.
Tsipras, meanwhile, called Merkel and other European leaders, assuring them that he was prepared to make new proposals that would clear the path for talks on new aid.
Merkel’s biggest worry is France.
French President François Hollande is under increasing pressure from left-wing critics at home to stand up to Merkel and fight for a restructuring of Greek debt.
Dozens of left-wing politicians attacked his supposed passivity on the Greek issue in an open letter last month, after which the president invited them to his office to explain that he was in fact acting as a discreet mediator between Athens and Berlin.
As the criticism grew, Hollande seemed to flirt last week with the idea of a more confrontational approach to Germany. He said that a new bailout deal was needed before the Greek referendum, not after, as German Finance Minister Wolfgang Schäuble demanded.
But that window of French independence, if it was ever open, may have already closed.
At a joint press conference with Merkel on Monday evening, Hollande said, “It’s now up to Tsipras to make serious and credible proposals.”
Merkel stressed the last offer from creditors was “very generous.”
In Brussels on Tuesday, leaders are expected to focus on the immediate issue of emergency funding for Greece. The European Central Bank would need to receive clear political signals to extend aid at the current level.
Given the short time frame before the next July 20 debt payment deadline, there was also question of a short-term aid program to tide Greece over. A larger, longer stability program would take more time.
As for debt restructuring, leaders are awaiting Greek proposals before starting any serious discussions, according to an adviser for Hollande, who requested anonymity because he was not authorized to speak to the press.
After Greece’s default last week, Germans are more skeptical than ever of sending more money to Athens. Even Sigmar Gabriel, the leader of the center-left Social Democrats, has abandoned his party’s more conciliatory approach to Greece.
Tsipras “destroyed the last bridges of compromise between Europe and Greece,” he said in the wake of Sunday’s vote. The SPD governs together with Merkel’s Christian Democrats in a grand coalition.
His shift underscores Merkel’s political dilemma.