As Greece hurtles toward a collision with its creditors in late June, German Chancellor Angela Merkel faces one of the hardest choices of her career: whether to let Greece default, or to bend Europe’s bailout rules and risk a revolt at home.
Greece’s rejection of its creditors’ terms for bailout aid–which Prime Minister Alexis Tsipras repeated in stark terms on Monday–points to a likely showdown at a European Union summit on June 25, where either the German or Greek leader must perform a dramatic U-turn to keep Greece’s bailout program on course.
For months, Ms. Merkel has sought to convince Mr. Tsipras that Greece will only receive financial aid from Europe if it enacts tough austerity and economic overhauls, approved by inspectors from the EU and the International Monetary Fund. But Berlin officials are increasingly resigned to Mr. Tsipras refusing to swallow such terms until it is too late.
Without a massive last-minute climb-down by Greece, that means Ms. Merkel will soon be forced to make the choice that Mr. Tsipras has been trying to confront her with all year: between relaxing Greece’s required overhauls, or potentially jeopardizing European stability.
“Angela Merkel is stuck between Scylla and Charybdis,” said Jürgen Falter, a prominent political scientist at Germany’s University of Mainz, referring to famous sea hazards in Greek mythology. “Whatever she does–it could be wrong.”
Ms. Merkel hasn’t commented publicly on Greece since Friday, when she called for talks to continue, saying: “Where there’s a will, there’s a way.”
The chancellor is loath to risk Greek bankruptcy and exit from the euro, Berlin officials say–and Greece’s leaders know it. The famously cautious German leader views the consequences of such outcomes as economically unpredictable, geopolitically damaging and harmful to her own legacy, people familiar with her thinking say. But agreeing to finance a Greek government that rejects its lenders’ economic medicine, which Ms. Merkel has for years called essential if Greece is to grow and be solvent, would undermine her credibility at home and in Europe, German officials fear.
At issue are the fiscal terms of further financial aid for Athens from eurozone governments and the IMF. The creditors are demanding that Greece agree to cut pensions and other public spending as the price of extending its bailout beyond June 30. Syriza and the austerity-weary country it governs want to end such measures, which they believe have only deepened Greece’s economic depression since its bailout began in 2010.
Greece’s counterproposals include spending cuts, tax rises and broader economic reforms. But lenders, especially Germany and the IMF, believe they don’t go nearly far enough to put Greece’s economy and finances on a stable long-term footing.
In early June, Ms. Merkel orchestrated a final offer to Greece from the IMF and European institutions, laying out the budget targets and policy measures that Athens must sign up to. Lenders view the offer as the minimum that meets the aim of Greece’s bailout: to make the country able to finance itself on bond markets again.
Mr. Tsipras doubled down on his rejection of that offer on Monday. “One can only suspect political motives behind the fact that the institutions insist on further pension cuts, despite five years of pillaging via the (bailout) memoranda,” the Greek premier said.
“We are carrying our people’s dignity as well as the aspirations of Europeans,” Mr. Tsipras said, alluding to Syriza’s belief that its antiausterity campaign is for the good of all of Europe.
His words added to the mounting concern in Berlin about the chances of reaching an agreement by next week. Without a deal by the of June, Greece will likely default on its IMF debts, could well lose central-bank liquidity support for its banks, and–depending on how panicky Greek savers get–may have to impose capital and deposit controls. A shortage of euros could force Greece to print IOU’s to pay pensions and wages and keep its banks alive, putting it on a slippery slope to a national currency.
Even a deal in late June would only open up the path to further struggles over the measures that Greece must implement to get cash and avoid defaulting on large bonds that fall due on July 20 and August 20.
German politicians across the spectrum are fuming at what they see as Greece’s irresponsible effort to blackmail Ms. Merkel. Vice Chancellor Sigmar Gabriel, head of the left-of-center Social Democrats who are coalition partners to Ms. Merkel’s conservatives, warned on Monday that Greece is testing Europe’s patience to the breaking point.
“The game theorists of the Greek government are currently gambling their country’s future away,” Mr. Gabriel wrote in mass-market tabloid Bild. “They are turning away Europe’s offers of billions in aid in the hope that we will, in the end, avoid requiring the Greek government to do anything in return because everyone is too afraid of a Greek exit from the eurozone.”
If the Syriza-led government forced Berlin to cave in, it would invite populist politicians on the right to try to blackmail Europe too, Mr. Gabriel wrote.
Volker Kauder, parliamentary leader of Ms. Merkel’s conservative Christian Democrats, has repeatedly said German lawmakers would only consent to more bailout financing for Greece if it accepted IMF-approved reforms. “The Greece government has to get back to reality,” Mr. Kauder told German state television on Monday.
Mr. Tsipras, for his part, said Greece would wait patiently until the EU and IMF “adhere to realism.”