By Simon Nixon
One of the Greek government's biggest mistakes since taking
office in January has been to assume that its fate lay in German
hands. For the first two months, it refused to deal with the
"Troika" of international lenders--comprising the European
Commission, the European Central Bank and the International
Monetary Fund--since renamed "the institutions," now known as "the
Brussels Group." It was reluctant even to negotiate with the
Eurogroup of European finance ministers, which has had political
responsibility for overseeing all eurozone bailouts.
Instead, Prime Minister Alexis Tsipras believed that Greece's
fortunes hinged on a "political deal" that pitched Athens against
Berlin. Over 10 hours of talks in both Brussels and Berlin, German
Chancellor Angela Merkel tried to convince Mr. Tsipras that he was
wrong: he had overestimated Germany's power and underestimated the
importance of respecting eurozone rules and processes. Mr. Tsipras
may have dug himself into a hole by promising voters that he would
end the bailout but Ms. Merkel could do little to pull him out.
That doesn't mean Ms. Merkel is indifferent to Greece's fate.
Ms. Merkel doesn't need homilies from anyone on the importance of
keeping the eurozone intact. After all, she defied domestic opinion
and the advice of senior ministers when she agreed to Greece's 2012
bailout which prevented a messy euro exit. She said then, and
repeated this month, that she believes that "if the euro fails,
then Europe fails." The German government is fully aware that a
Greek euro exit could have geopolitical as well as economic
consequences.
But Berlin is adamant that it cannot deliver what Athens has
been effectively demanding: unconditional loans. For Germany, it is
a vital legal principle that the deal struck by the previous Greek
government whereby Athens would receive loans--the bulk with
30-year maturities at very low interest rates--in return for fiscal
and reform commitments remains a continuing obligation of the Greek
state. Greece may have a new government but Athens remains bound by
the terms of its bailout in the same way that is bound by its
membership of NATO.
Of course, Athens is entitled to seek changes to its bailout
program, but it needs the agreement of all the other 18 members of
the Eurogroup, not just Germany. True, Germany has considerable
power in the Eurogroup, but Berlin has no mandate or authority to
negotiate directly with Athens on behalf of the other 17 eurozone
states. Nor is it clear it could impose a compromise deal on other
eurozone governments, many of which have domestic reasons to be
wary of succumbing to Greek pressure.
Besides, finance ministers have delegated the task of designing
and evaluating bailouts to the institutions formerly known as the
troika. There are two good reasons for this. The first is that
finance ministers don't have the technical expertise to pass
judgment on fiscal adjustment packages. Second, it avoids the
politically toxic situation where one government sits in judgment
on the policies of another, thereby precluding bilateral deals. In
this respect, the independence and credibility of the IMF is
particularly essential to reassure national parliaments that
bailouts have been rigorously designed.
In Berlin--and across the eurozone--there is frustration that
Athens spent two months challenging the process, rather than
working on the substance of its program. Nobody disputes that
symbols are important and that the bailout machinery is widely
detested and politically toxic in Greece. But it will be much
easier to change symbols and adapt processes once an agreement on
substance has been reached.
German officials are still optimistic that Mr. Tsipras can reach
a deal with the institutions that satisfies both sides even if they
are currently far apart. They note that national governments have
always had wide discretion to shape the overall program reflecting
their own political priorities; there is always more than one path
to the same goal.
For instance, if Mr. Tsipras wants to spend more on humanitarian
assistance, he could perhaps fund it by cutting spending on
defense. Similarly, if he can raise an extra EUR3 billion ($3.27
billion) from tackling tax evasion and increasing taxes on the
wealthy, it may not need to end the special VAT tax breaks enjoyed
by Aegean islands or scale back early retirement opportunities for
some public sector employees.
But what remains nonnegotiable is that Athens's proposals must
be fully evaluated by the institutions, a program agreed and some
reforms implemented before any cash can be disbursed.
Of course, this will take time. But Athens has received little
sympathy from Berlin over its warnings that it is running out of
cash and might be forced into a messy default. German officials
note that the date on which Athens says it will run out of money
keeps changing. They also note that a determined government can
usually find ways to avoid default, if necessary by building up
arrears and drawing cash from other state institutions. The crunch
will come in July when Athens must repay EUR3.5 billion to the ECB.
Meanwhile, the liquidity squeeze is putting necessary pressure on
Athens to negotiate.
In the past week, there are some signs this pressure is working.
Eurozone officials say that for the first time there has been
constructive engagement between Athens and the institutions. Athens
has submitted a list of proposed reforms that provide a basis for
discussion, although details remain so far inadequate and technical
teams are still hampered by the refusal of Athens to allow them to
talk directly to ministers, say officials familiar with the
negotiations.
What is clear is that the decisive moves in this saga will be
made in Athens, not Berlin. Mr. Tsipras campaigned on a promise to
keep Greece in the euro but also to change the eurozone. Now it is
clear he cannot do both, his challenge is to reach a deal with the
institutions and then sell it to his party and parliament. That
makes this crisis a far bigger test of Mr. Tsipras's political
skills than those of Ms. Merkel.
Write to Simon Nixon at simon.nixon@wsj.com