On Wednesday, new Greek Finance Minister Yanis Varoufakis met with European Central Bank President Mario Draghi. On Thursday, he will meet German Finance Minister Wolfgang Schaeuble. These meetings are part of Varoufakis' tour of Europe — including London, Paris, Rome, Frankfurt and Berlin — undertaken since the Coalition of the Radical Left, known as Syriza, won Greece's general election Jan. 25. Draghi appears to be Greece's most important interlocutor. Though the International Monetary Fund and the eurozone hold the majority of Greece's bonds, it is the European Central Bank that has the power to collapse the Greek economy by refusing its banks liquidity assistance. Still, the Thursday meeting with Schaeuble is likely to prove more definitive.
The European Central Bank's track record of threatening member states with economic collapse if they do not comply with bailout programs is well known. Ireland, Spain and Cyprus all received letters to this effect at sensitive moments in their recent history, and each decided not to call the bank's bluff. It is sometimes forgotten though, that the bank does not act unilaterally in these situations. If Draghi threatened Greece in a similar manner and then followed through with his threat to collapse the Greek economy, ultimately forcing a Greek exit from the eurozone — which could unravel the entire union — history would look unkindly on the unelected central banker who collapsed the European Project. Therefore, it is only with the support of Europe's governments that the European Central Bank can act so aggressively. Europe's finance ministers will hold an emergency meeting Feb. 11, and the heads of state will meet the following day. The future of Greece — and Europe — will be decided at these meetings.
In these international deliberations, Germany will set the tone. Not only is it Europe's number one creditor, with the most to lose in any debt renegotiations, but it is also the chief representative of the status quo against which Greece is rebelling. Other governments in Europe might find Varoufakis' talk of a post-austerity world appealing. However, he has not convinced them to throw their lot in with the new Greek government in the coming confrontation.
However, Spanish Prime Minister Mariano Rajoy will be fighting Syriza's Spanish equivalent, Podemos, in general elections slated for the end of 2015. Any concessions made to Greece will strengthen support for his adversary. The governments of Ireland and Portugal, whose populations have also suffered under austerity reforms, will be wary of a Greek victory as well, since it could show that their suffering has been unnecessary. France and Italy are the two likeliest allies for Greece, which explains why Varoufakis visited them ahead of Germany on his European tour. However, neither France nor Italy has yet shown any public willingness to go against Germany on the subject of Greece.
Germany and Greece's negotiating positions sit at either end of a scale. At one end, Germany would like to see a continuation of the status quo — for Greece to extend its bailout program, continue to undertake economic reforms to increase competitiveness and pay off its debt over time. At the other end, Syriza would like to reverse labor reforms, increase spending and write off some of its debt (though Varoufakis has stepped back from this last request). If the two sides cannot find a compromise somewhere along this scale, a Greek exit (colloquially referred to as a "Grexit") is inevitable. Varoufakis, an economist versed in game theory, should be well equipped to navigate these waters.
According to the party line, the German position is simple: If Greece wants to leave, let it go. A German economist on the BBC's Today Show on Wednesday morning described Greece as a man standing on a roof threatening to jump, with Germany as a concerned bystander offering to help him with his problems. However, this description ignores that the bystander is tied to the potential jumper and is likely to suffer significant damage should the man jump.
A Grexit would hit both sides, particularly if, under current legislation, Greece was forced to leave the European Union as well as the eurozone. Greece would lose its strong currency, its relatively cheap access to lending, access to the free market, EU cohesion funding and a great deal more. A Grexit would also create a mechanism for leaving the eurozone that would make the entire structure less stable. Moreover, Greece has always required a large benefactor in order to function. If Europe kicks Greece out, the Greeks could turn to Russia for financial support. The amount of money that Russia would have available for such support is questionable, but regardless, the prospect of Russia gaining influence in Europe's backyard would be unwelcome.
Both sides seek a solution, and neither wants to see the Grexit that would come if negotiations break down. As Varoufakis knows, this is a hopeful basis for negotiations. On paper, Germany has the stronger hand at this stage. So far, it has the support of Europe's members and some influence over various tools that could hurt the Greek economy, and it is defending the status quo, which is always a stronger position for starting negotiations. But as with any bargain, both sides will give ground eventually. The Europeans probably will play for time, negotiating an extension to Greece's bailout in exchange for granting the Greek administration some spending concessions. If the deal comes down too far in the Europeans' favor, the confrontation will restart further down the line. If the Greeks end up on top, the Syriza effect could prove contagious, and their counterparts in other debtor countries will take a great leap forward. The situation is set: The bargaining for Europe's future is about to begin.
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