Germany is playing a dangerous game. It may well succeed in crushing Greece's ability, though not its desire, to escape debtor's prison. But at what cost to European unity? Greek resentment of Germany is palpable and the rise of the anti-austerity parties across southern Europe – some on the far left, others on the far right – shows that the sentiment is spreading at an alarming rate. The political centre is not holding and locking Greece into austerity-hell could make the centre disintegrate.
Relations between Germany and Greece are poisonous – neither side trusts the other. Greece does not believe Germany and its pro-austerity allies, including Finland and the Netherlands, will cut it any fiscal slack in spite of the dire state of the Greek economy. Germany doesn't believe Greece has any intention of reforming its economy in spite of endless promises to do so. Since Germany is Greece's single biggest bailout creditor and the effective leader of the euro zone finance ministers, who will decide Greece's fate, Greece will surely have to buckle.
Greece's new radical left Syriza government, led by Prime Minister Alexis Tsipras, was elected in January with a compelling mandate to put Greece on a new economic course after five years of grinding recession. The plan was to negotiate an end to the austerity programs that have deepened the downturn and find a way to write off a chunk of Greece's debt, which is the highest in Europe, at 175 per cent of gross domestic product. The latter effort failed within minutes. Now the former is failing too. The Eurogroup rejected the first two Greek proposals for a new financial and reform package and, on Friday night, tentatively accepted a third proposal, one that came after Greece substantially diluted its demands. It will see Greece's financial lifeline renewed for four months, but only if Greece's economic reform commitments, which are yet to come, are accepted by the euro zone's finance ministers.
It is now is abundantly clear that Greece will get little of what it campaigned for during the election. Germany has employed a binary negotiating stance: Extend the existing bailout program and all the austerity conditions that go with it or you're free to leave the euro zone.
Germany is setting itself up for a Pyrrhic victory, for alienating Greece is to alienate the other struggling economies on the euro zone's Mediterranean frontier, each of which has increasingly popular protest parties.
Germany's strategy makes sense on a certain level. Roughly half of Germans think Greece has no business being in the euro zone, given its aggressively uncompetitive economy and its apparent allergic reaction to reform and paying taxes. Their view is that the European Union used the twin bailouts, worth €175-billion ($250-billion), to spare Greece from self-immolation and an almost sure exit from the euro. In exchange, the Greeks should meet the bailout conditions with obedience and good grace, as Ireland and Portugal did. To reverse course and dilute Greece's bailout conditions would cost German Chancellor Angela Merkel and her Christian Democrats dearly in any election.
The strategy might be less parochial than it appears. Germany might be thinking: What better way to discourage Syriza look-a-likes than ensure the failure of Syriza's bid for freedom?
If Syriza were to get what it wants, the anti-austerity parties in Portugal and Spain would surely demand equal treatment. Already, Podemos, the Spanish protest movement with Marxist roots and links to Syriza, is leading the polls, a remarkable achievement for a party that did not exist a year ago. In Portugal, another fiscal basket case, the opposition socialists are gaining momentum and will likely form the next government. It was the socialists who negotiated Portugal's austerity-laden bailout package in 2010. Now, as they attempt a comeback, they insist austerity has pushed the country into deflation and poverty.
Berlin's calculus might be horribly wrong, for ensuring Syriza's negotiating failure could easily encourage the protest parties in Greece and beyond as anger against the rich creditor countries in northern Europe intensifies. In a recent interview with The Globe and Mail after the Jan. 25 election, Athens Mayor Giorgos Kaminis said his biggest fear was the rise of Golden Dawn, the violent neo-Nazi party that placed third in the election, with 6.3 per cent of the vote. "This [Syriza] government represents the left alternative and if we see it failing, then we will see the extreme right alternative – those fascists – gaining ground."
Germany is lucky in that most of the protest parties in southern Europe, including Syriza and Podemos, want their countries to stay put in the euro zone. That could change. Throughout the south, support for the euro, while still fairly high, is falling. In Italy, all three of the main opposition parties have adopted an anti-euro stance.
If Syriza is crushed and Greece remains trapped in a deflationary spiral, where high unemployment and poverty remain rife, how much longer can support for the euro last? Already, the view among many Greeks is that exit from the euro, and reprinting the drachma, would cause no more economic and social hardship than keeping the euro. Millions of Portuguese and Spanish are contemplating the advantages of going back to currencies that could be devalued. Germany's hardline tactics on the Greek bailout are laying the foundation for an open political revolt in southern Europe. The risk of financial contagion has been replaced by the risk of political contagion so potentially deadly it could kill the euro zone.
Eric Reguly