The past few days have certainly been rich with dramatic twists and turns in the Greek drama. Nobody knows with certainty how the story will end—not the Greek politicians, the German creditors, or least of all me.

However, given the amount of noise and sometimes childish excitement on all sides, it is worth the effort to put aside the understandable irritation of the last few frustrating months and try to make a few larger considerations:

It is not true that “after the referendum is before the referendum.” In other words, the balance between creditors and the Greek government has shifted, and potentially in the prime minister’s favor, although it remains to be seen by how much. Greece’s Prime Minister Alexis Tsipras has solidified his political position in Greece. Any attempt at regime change is off the table for now. Creditors have to finally accept that if a deal is struck, it will be struck with the democratically-elected Tsipras and his government, not some technocratic government of national unity. Even debt forgiveness, a no-go area for the government in Berlin just a few days ago, is back on the table, at least in some form. At this point let’s just assume that if Tsipras goes, it will only be because Greece has left the euro zone.

Against this backdrop, and barring the temptation on the Greek side to over-estimate its hand, the ball is only partially in the court of the debt-stricken southern European nation. It is true that Greece has to make credible proposals and that real negotiations have to start. Once they do, however, the European Central Bank (ECB) will regain the necessary legal justification to raise the limit on its Emergency Liquidity Assistance (ELA) and give Greek banks some oxygen to breathe, at least for a while. We are talking days not weeks.

How those negotiations progress will depend on more than Greece. Restoring trust is important and initially the burden will be on Tsipras. But then it will become clear whether there are those on the creditors’ side who are looking for excuses to boot Athens out. I am afraid that some in the German government have to do some soul searching as well, since some cabinet members are starting to be perceived as hindrances to a return to a calmer atmosphere among partners. That, at least, is how I interpret the words of the President of the European Commission Jean-Claude Juncker, who before the European Parliament decried the active attempts by some “German-speaking” creditors to torpedo talks with Athens. Having a bad cop is useful in tough negotiations when the other side plays with fire, but it becomes a counterproductive exercise if letting part of the house burn down becomes the goal. Furthermore, the united anti-Tsipras front of the past few weeks will melt away. France, Italy, and even Austria are looking for a compromise, rather than retribution. Germany can ill afford finding itself in a minority of hardliners.

As to Chancellor Angela Merkel, she has shown incredible capacity to adapt to changing conditions. This time, though, the limits of her crisis management mechanism, based on temporary transfers of sovereignty from debtor countries to creditor countries within the euro zone, has shown its most blatant limits. Hiding behind the institutions and a rule-based approach cannot eliminate the fact that ultimately a decision about membership in the common currency area cannot be left to the consequences of some technical accident, a shortage of liquidity, and the collapse of Greek banks in this case.

Membership is and must continue to be a political decision. Apart from the domestic politics, which have once again become toxic, Merkel has to face at least two big problems. If Greece stays in the euro area, her crisis management needs to be overhauled and replaced, possibly with a giant step toward real political and fiscal European integration. If Greece goes, the same applies, given the growing risk of political contagion. Once euro zone membership becomes reversible, when any political/economic crisis flares up, whether it takes place in Spain, Italy, or even France, it can quickly become an existential threat to the euro zone as a whole. That is not what any German chancellor would like to be remembered for. We will learn in the next few days how she will try to square this circle.

  • K Bledowski

    That [EMU] membership is and must continue to be a political
    decision constitutes part of the problem.

    Membership in a (credible) monetary union should always rest
    on economic fundamentals, not political whims. The EU is paying a heavy price
    for having built the EMU house on feeble grounds. It will now cost a huge
    amount of financial and political capital to just keep this house afloat, let
    alone create economic efficiency.

    Canada and the U.S. – far more economically integrated than
    France and Germany – do not share a currency for a good reason: two fully-floating
    dollars better allocate resources and allow for less costly countercyclical
    policies. Too often the EU puts the political cart in front of the economic
    horse.

    Paradoxically, it was the German establishment and the
    public that had got it right in the 1990s when they overwhelmingly opposed the
    EMU. Alas, the “political decision” of the day had got the better of the
    economic common sense.