The Greek compromise

To applause back home, Germany succeeded in conceding little to Greece – but the result might be future chaos.

When the eurozone finance ministers came up with a compromise with the new Greek government on the rescue package last week, the German media almost unanimously applauded Finance Minister Wolfgang Schäuble and Chancellor Angela Merkel. Although, later, there was some grumbling about the details of the list of reforms, the general tough stance of the German government was cheered.

The German media reaction is yet another sign that the German debate has been decoupled from that in the rest of Europe.

After all, on material issues, very little was conceded. German media hailed this as a victory for the German government against some naughty boors from Athens who wanted once more to violate rule and order in Europe. If anything, commentators wished that Schäuble had taught the Greeks a harsher lesson.

The German media reaction is yet another sign that the German debate has been decoupled from that in the rest of Europe. It is true that almost everyone in the euro group was annoyed by the Greek finance minister’s way of trying to renegotiate the agreements on which the rescue packages were based. But European governments also shared the feeling that, in economic terms, Yanis Varoufakis had a point in criticising the economic rationale of the adjustment packages. Even the British Economist magazine – not famous for supporting left-wing socialist dreams – wrote in its latest issue: “the euro zone desperately needs a counter-narrative to its failed German-inspired policy of austerity.”

At home in Germany, by contrast, Berlin’s policy stance in the euro crisis is generally seen as having been the best possible response to the crisis. At a dinner organised by ECFR last week, most attendants seemed to be offended by the mere mention of the idea that there might have been better (and less costly) ways to navigate through the euro crisis than the approach that Angela Merkel has taken since 2010. It is very seldom noticed that output in the euro area has not reached the levels seen before the global financial crisis of 2008, while the output of the United States is by now about 10 percent higher than pre-crisis levels – even though the 2008 crisis originated in the US. The brutal increase of unemployment in the rest of Europe is equally underappreciated.

In the process, the political polarisation in Europe might further increase.

Germany’s ignorance of what is going on outside its borders presents risks for the eurozone. In fact, the Greek compromise has solved very little. There are plenty of indications that Greek government debt is not sustainable, even if the government in Athens were completely willing to implement all the reforms thought up in the German finance ministry. As Wolfgang Münchau has pointed out, the IMF’s debt sustainability analysis is based on heroic assumptions of economic growth, primary deficits, and the quick return of inflation in the euro area. Deviation from any of these assumptions will mean missing the target of bringing Greece’s debt level down to sustainable levels by the next decade. This means that a future showdown with the Greek government is both possible and likely.

In the process, the political polarisation in Europe might further increase. Within the crisis countries, political forces that question the narrative that there is “no alternative” to the current policy stance are gaining in the polls, while traditional centre-left and centre-right forces are being squashed. Syriza in Greece, Podemos in Spain, Sinn Féin in Ireland, and the Front National in France – all these political parties offer their electorates an alternative to current macroeconomic policies, unfortunately sometimes combined with very bad ideas about, for example, migration or the broader architecture of Europe in the world. We have just seen the amount of turmoil that a populist government in a small member state can cause. How much could be blocked in Europe if a populist movement were to govern a large member state? In the end, Germany’s latest victory in the euro area might prove to be a pyrrhic one.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


ECFR Alumni · Senior Policy Fellow

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