Temporary deals aside, is Germany preparing for a hasty Grexit?

Letter from Germany’s ‘five wise men’ says euro zone would be stronger without Greece

Almost four weeks after Alexis Tsipras swept to power in the Greek elections, Greece and its international creditors remain locked in a game of high-stakes brinkmanship.

Five years since Greece became the first of five euro zone countries to succumb to an EU-IMF bailout, the prospect of a “Grexit” has once again moved centre-stage.

At issue again is the cohesion of the euro zone, and whether Germany, and a majority of the 19-member Eurogroup, are willing to countenance a Greek exit. Yesterday a letter from the so-called "five wise men" – the German Council of Economic Experts that advises the German government – appeared in the daily Frankfurter Allgemeine Zeitung suggesting that the euro zone would be stronger without Greece.

Meanwhile, Der Spiegel carried a story claiming that the European Central Bank (ECB) was preparing for a Greek exit. In an interview published ahead of yesterday's meeting, Malta's finance minister, Edward Scicluna, also underlined the strength of German resistance to changes to programme rules.

“I think they’ve now reached a point where they will tell Greece: ‘If you really want to leave, leave,’” he said.

Showdown

The standoff between Greece and its international lenders has been billed as a showdown between Athens and Berlin, and to some extent, it is. According to officials involved in the negotiations, trust between Berlin and Athens has broken down over the past few weeks, with go-betweens such as Jean-Claude Juncker serving as brokers between the two. The decision by the Greek government not to prioritise Berlin on its tour of European capitals in its first week of office appears to have been misjudged, while Nazi-themed commentary from Greece has annoyed many Germans.

There are also suspicions in EU circles that the demonising of Germany has been orchestrated by Athens, with the Greek media promulgating the idea that Europe is divided on the Greek issue. The suspected leaking of private documents by Greece has also infuriated many in Brussels and Berlin.

The notion of Germany as the sole antagonist of Greece is overdone. Germany is not alone in its tough stance. Slovakia, Finland, the Netherlands and Spain are among those countries that have been taking a hard line in meetings.

Slovakian prime minister Robert Fico voiced his opposition to conceding more ground to Greece this week, explaining the difficulties of selling such a deal to the Slovakian public, given that the minimum wage in Greece is much higher than that in Slovakia. Other countries, such as Finland, Spain and Portugal, which are facing imminent elections, are reluctant to capitulate to Greek demands, conscious of how this will play out domestically. The Spanish government in particular is fearful that concessions to Syriza could galvanise support for Spain's left-wing Podemos party.

With the Greek bailout due to expire in a week, leaving Greece facing potentially a multibillion-euro shortfall, time seems to have been the impetus that was needed for both sides to sign up to a general proposal last night.

Concern about the state of the Greek banks is also weighing on decision-makers. While the ECB distanced itself from yesterday's Der Spiegel report, and sources said that capital controls had not yet been discussed by its governing council, it is indisputably concerned about the deposit outflows from the main Greek banks, estimated to be up to €2 billion a week.

Liquidity assistance

On Wednesday, the ECB agreed to provide further emergency liquidity assistance (ELA) to the Greek financial sector, having increased it by €5 billion to €65 billion the previous week. The move to increase the ELA limit by €3.3 billion – well below the €10 billion rumoured to have been requested by the Greek central bank – was a clever tactical move by Frankfurt. By giving Greece limited leeway, Frankfurt has shown its commitment to keep the Greek financial system afloat while retaining the prerogative to change its position at any time.

A number of ECB governing council members, including German Bundesbank head Jens Weidman, have stressed that ELA is a temporary measure that can only be provided to solvent banks. While the ECB technically extended the ELA provision for another two weeks, it can reassess its stance at any time.

The ECB remains an important actor in the Greek drama, though it has reportedly been pushing for the Eurogroup to make the real political decisions. With just a week to go on Greece’s current bailout and a six-month holding arrangement likely to be put in place until the summer, this epic still has many more acts to run.

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