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09/12/2016

Cautious Merkel faces riskiest move with ‘Grexit’ decision

Euro & Finance

Cautious Merkel faces riskiest move with ‘Grexit’ decision

Angela Merkel arrives for a meeting of the European Council, November 2012

[European Council]

“If you break it, you own it,” former US Secretary of State Colin Powell warned President George W. Bush before his invasion of Iraq.

Whether it will ever be fair to blame Angela Merkel for “breaking” Greece is debatable. But it seems inevitable that the German chancellor will “own” the Greek problem, and that a decision to let Athens go would profoundly shape her legacy.

For months, the notoriously cautious Merkel has been wrestling with the question of whether to risk a “Grexit” and accept the financial, economic and geopolitical backlash it would surely unleash.

Unlike her finance minister, Wolfgang Schäuble, who sent abundant signals in recent months that he could accept a eurozone that does not include Greece, Merkel has been determined to avoid such an outcome, according to her closest advisers.

Laying the blame

If Greece ends up leaving the eurozone anyway, many in Germany and elsewhere will blame the left-wing government of Greek Prime Minister Alexis Tsipras that came to power in January. It has infuriated its partners with what they have perceived to be an erratic, confrontational stance in the debt talks.

Tsipras’ call on Friday for a referendum on Europe’s latest bailout offer, only days before Greece is due to run out of cash, made it easy for Merkel, 60, to say enough is enough, and threaten to pull the plug once and for all.

But it will be Merkel, more than any other European leader, who will have to sort through the rubble of a “Grexit” and answer the question of why disaster was not averted.

>>Read: Tsipras calls Merkel and Hollande’s offer ‘blackmail’

A Greek exit could lead to a humanitarian crisis on Europe’s southern rim, spark contagion in euro countries that are only just emerging from years of deep recession, and stoke a fiery new debate about German austerity policies and Merkel’s handling of the crisis.

Allowing Greece to exit would be by far the boldest move she has taken since coming to power nearly a decade ago, far riskier than her decision in 2011 to phase out nuclear power.

In private conversations, Merkel has acknowledged as much, saying her biggest fear is that Germany could be blamed for “blowing up Europe” for the third time in a century.

With a British referendum on its membership in the European Union looming, the standoff with Russia over Ukraine unresolved, and the continent struggling to find answers to a migration crisis and growing threat from Islamic extremists, chaos in Greece would send a horrible signal to the world about the state of Europe.

“Europe’s internal crisis is playing out in a dangerous, unstable geopolitical environment,” former German Foreign Minister Joschka Fischer wrote in a recent article for Project Syndicate. “Preventing the EU from falling apart will require, first and foremost, a strategic solution to the Greek crisis.”

Schäuble: The sceptic hawk

It is the lack of a “big picture” strategy that Merkel’s critics have faulted her for since the eurozone crisis first erupted in Greece over five years ago.

She has stuck doggedly to her “step by step” approach, in which aid is doled out in return for commitments to economic reform and deep spending cuts. Some economists – and the new Greek government – argue that this strategy has crushed the country, preventing, rather than aiding, recovery.

In recent weeks, Merkel has come under criticism for letting Schäuble take the lead in the negotiations with Greece, even though his scepticism is well known.

As far back as 2012, the German finance minister was arguing that the eurozone might be better off without Greece. In his 2014 memoir Stress Test, former US Treasury Secretary Timothy Geithner described Schäuble’s stance, laid out in a meeting between the two on the North Sea island of Sylt three years ago, as “frightening”.

Merkel pushing for a deal

Still, it is difficult to fault Merkel for not pushing hard for an agreement behind the scenes. Back in March, during Tsipras’s first visit to Berlin as prime minister, she spent over five hours with him at a dinner in the Chancellery going through Greek reform pledges line by line.

“What we told the Greeks is that if they came up with a viable plan, then Merkel would fight for it,” a senior aide said after the meeting.

For now, the sense that she did her best to reach a deal with Tsipras, and the widespread feeling in Germany that the Greek government has behaved irresponsibly in the negotiations, is likely to ensure broad domestic support.

>>Read: EU heavyweights go extra mile for Greece

Over the weekend, politicians from across the political spectrum took to the airwaves to condemn Tsipras and back Merkel. Influential conservative media, like top-selling daily Bild, and the Frankfurter Allgemeine Zeitung, have also swung behind her, after questioning in recent weeks whether she would “go soft” in the final round of talks.

How long the German consensus lasts however, is an open question. Merkel’s coalition partners, the Social Democrats (SPD), will be quick to turn on her if the economic and financial costs of an eventual “Grexit” prove unwieldy.

Cracks in the European consensus

And Germany’s allies in Europe and beyond could also begin to question her handling of the crisis.

The United States, worried about the geopolitical consequences of Greece leaving the euro at time of rising global threats has been pushing hard behind the scenes for Merkel to keep Athens in the currency bloc at all costs.

In a sign of this concern, US Treasury Secretary Jack Lew called Schäuble, his French counterpart Michel Sapin and IMF Managing Director Christine Lagarde over the weekend, pressing them to agree a “sustainable solution” for Greece that includes debt relief – a step Merkel has resisted.

More worrying than complaints from Washington would be cracks in the European consensus on Greece.

France has toed the German line until now. But at a decisive meeting of eurozone finance ministers on Saturday, France broke with Germany and other countries, arguing in favour of extending Greece’s bailout to allow a referendum to take place, eurozone officials said.

The French were slapped down, and the Greek request for an extension denied. Now Merkel, barring a miraculous eleventh hour deal with Athens, must face the consequences.

Background

The anti-austerity party Syriza won an overwhelming victory in the Greek elections on January 25, but failed to obtain an absolute parliamentary majority.

The party leader Alexis Tsipras provoked mixed reactions among his EU counterparts, announcing that the "vicious cycle of austerity is over".

Reforms offered by Athens have failed to convince the Eurogroup and the country's creditors, and Greece now finds itself unable to pay its debts and in a more precarious situation than ever.

The proposals were a bid to unlock the final €7.2 billion tranche of its international bailout, which creditors have refused to release unless Greece agrees to more austerity measures. Greek Prime Minister Tsipras was elected promising to end five years of austerity.

Without the bailout cash Greece will be unable to meet a €1.5 billion International Monetary Fund (IMF) payment on Wednesday (30 June), and a default could send Athens crashing out of the single currency and possibly the EU.

>>Read: Live: Grexit? The endgame