Summary
After intense negotiations July 11 and 12, the Eurogroup gave Greece until July 15 to introduce additional economic reforms in exchange for a third bailout program. But the negotiations are also dividing creditors. Countries lead by Germany are openly discussing the possibility of Greece leaving the eurozone, while others led by France are pushing for a political agreement. As a result, the Greek crisis could destabilize several governments across the eurozone, intensifying divisions between northern and southern European countries and reversing six decades of continental integration.
Analysis
Eurozone finance ministers asked Greece on July 12 to introduce additional reforms on pensions, approve a broader program of privatizations, review its labor legislation, clean up its banking sector and de-politicize its public administration. Only then, the finance ministers believe, will Athens be in condition to begin negotiations for a third rescue package.
The events of the weekend were notable because they highlighted the extent to which the crisis goes beyond the situation in Greece. For the first time in six decades of European integration, Germany, a founding member of the European communities, is open to the idea of reversing the process of economic and political convergence in Europe. While Eurogroup members were debating in Brussels, German media revealed that the country's Finance Ministry issued an internal paper suggesting Greece be suspended from the eurozone for five years. It is a remarkable development. It shows that a part of the German government no longer believes that the euro is "irreversible," as EU treaties describe it.
In addition, the Greek drama has deepened the friction between Mediterranean Europe and Northern Europe. Germany is not the only country making additional demands to Greece. Other northern countries such as Finland and the Netherlands support it. Even smaller economies such as Slovakia, Slovenia, Latvia and Lithuania are skeptical of Athens' ability and willingness to introduce reforms. Many of these smaller countries have introduced painful austerity measures to cope with Europe's financial crisis and now oppose any leniency with Greece. Latvian Prime Minister Laimdota Straujuma recently noted the irony of asking the small Baltic nation to provide financial help to Greece, a country "where pensions are twice as high as those in Latvia."
Greece does not have many friends in the Eurogroup these days, but France and Italy have recently softened their position and requested a political solution to keep Athens in the eurozone. Paris and Rome fear the financial contagion of a Grexit, at a time when their economies are struggling to grow and create jobs. Both countries also have center-left governments where several lawmakers are sympathetic with Greece and want a political solution to the crisis. Confronting the German position, French President Francois Hollande said Paris is willing to do whatever it takes to keep Greece in the eurozone, while Italian Prime Minister Matteo Renzi asked Berlin to stop humiliating Greece.
The European Union would probably survive a Grexit, but would definitely collapse if France and Germany, the two largest political and economic powers of the bloc, have a major disagreement. After the Greek referendum, Paris helped Athens come up with more comprehensive proposals for economic reform, only to face an unwavering Germany. France has traditionally sought to be a bridge between Northern and Southern Europe, as its location makes it both a Mediterranean and a northern nation. The Greek crisis has made this strategy particularly difficult, because protecting ties with Berlin now conflicts with the goal of leading Southern Europe.
Domestic Concerns
The Greek crisis is also generating domestic concerns for the key players involved. The vote in the Greek parliament July 10, when lawmakers approved a plan to introduce austerity measures less than a week after those measures were rejected in a referendum, fractured the Greek government. 17 members of the ruling Syriza party voted against, abstained, or were not present in the vote, putting Prime Minister Alexis Tsipras' control over a majority of the Greek parliament into question. The Greek government has a majority in parliament by 11 seats, and the plan was only approved because of support from the opposition.
Immediately after the vote, Greek Economy Minister Giorgos Stathakis said lawmakers who disagree with the government's plans should be expelled from Syriza. This is probably the worst time to begin a witch-hunt in Greece, as the government was fragile even before the vote. A key concern for Northern European countries is whether the Greek parliament would be able to introduce reforms in exchange for additional funds. The July 10 vote confirms that Tsipras will probably need support from the opposition to pass the legislation he is promising to the creditors, a situation the prime minister may not be willing to tolerate for long. Given Greece's political situation, the collapse of the current government is becoming increasingly likely.
But Greece's crisis is also creating domestic problems for the creditors. Since negotiations with Greece began in early February, German Chancellor Angela Merkel has seen resistance from conservative members in her CDU/CSU party, who doubt Athens' sincerity in its promises for reform. A third Greek bailout will have to be ratified by the German parliament, which partially explains why Berlin is pushing Athens for strict conditions before any money is released.
However, Merkel governs in coalition with the center-left Social Democratic Party of Germany (SPD), which tends to be relatively softer on Greece. SPD members recently criticized party leader Sigmar Gabriel because of his statement that the Greek referendum burned all bridges for an agreement. The proposal by the German Finance Ministry to suspend Greece's membership in the eurozone put the SPD in an awkward situation, and the party issued a statement July 11 supporting France's initiative to keep Greece in the eurozone. Merkel and her CDU/CSU are popular and the SPD is not ready to make the government fall and have early elections, but as the Greek crisis tests the resilience of the Franco-German alliance, it is also testing the strength of Germany's ruling coalition.
Finally, the Greek crisis is challenging the Finnish government as well. Since March, Finland has been ruled by a coalition that includes the Euroskeptic Finns Party, which opposes a third bailout for Athens. Finland has traditionally followed a hard line when it comes to eurozone bailouts, but the government's composition has reduced Helsinki's room to maneuver. Like Germany, the Finnish parliament will have to ratify a third bailout for Greece.
A Systemic Crisis
The European Union is not merely facing a Greek crisis. It is facing a systemic crisis. The events in Greece have shown the extent to which a currency union without a fiscal union leads to conflict in Europe. The Greek government has presented the conflict as an attempt to weaken Greece's democracy, which is an incomplete explanation. The eurozone is a club of 19 democracies with their own national interests, priorities and constraints. Each actor has to pursue its own goals, all the while fettered by its domestic politics.
The Greek government promised to end austerity, remain in the eurozone and achieve debt relief, which ultimately proved impossible. The German government needs to protect its exports markets - and therefore the currency union - while making sure taxpayer money is not squandered. The French and Italian governments want to lead Mediterranean Europe while protecting their political ties with Germany. Bailout countries, such as Spain, Portugal and Ireland, are terrified that leniency with Greece would strengthen anti-austerity political forces at home. And small northern and Baltic nations, where the economic downturn was particularly severe during the early stages of the financial crisis, reject the idea of having to compromise their national wealth to help a country on the other side of the Continent.
Things would probably be easier if Europe were a federation, but history and geography make it impossible. What began as a technical debate about the fiscal situation of a peripheral country has escalated into a conflict that is stripping the structural weaknesses of the European Union. The European Union still has a week to find a solution to this conflict. Greece's debt with the European Central Bank, after all, is due July 20. The decisions made in the coming hours, though, will shape not only the future of Greece, but also the fate of the European Union.