Greece and Germany are set to face off again Friday—but on two different pitches. Upstart Greece faces perennial powerhouse Germany in soccer’s (AKA: futbol) European Championship. But while the outcome of that match will be concretely determined Friday, it’s likely the other face off continues for the foreseeable future.
Wednesday, Greece’s New Democracy party reached a coalition agreement with the other pro-bailout parties (PASOK and the Democratic Left) and officially formed a ruling government. The coalition now controls 179 of parliament’s 300 seats, ending a contentious political limbo that refreshed fears Greece would suddenly exit the euro with all the messiness that could ensue. While almost everyone lauded the agreement as a testament to leaders’ commitment to maintain the euro, politicking is likely far from over.
Focus now shifts to renegotiation of Greece’s bailout terms—a contest likely pitting German Chancellor Angela Merkel against new Greek Prime Minister Antonis Samaras to see who can extract the best deal—and the release of 1 billion withheld by the troika following the first failed election. Merkel shot first, insisting Greece implement reforms it agreed to in exchange for earlier bailouts. Samaras retorted by announcing his government would seek a two-year extension to an EU-IMF deadline for Greece to reduce its budget deficit.
Their initial salvos are telling. Despite an overwhelming desire by most eurozone politicians to maintain the euro, one eurozone diplomat summarized Merkel’s (and other eurozone leaders’) political position best—“Greece has to realize that we have to win elections too and any more money from our taxpayers for Greeks is unsellable.” However, two months of struggles to form a government stalled Greek progress toward state asset privatization efforts, increasing tax collection, mitigating tax evasion and improving productivity and competitiveness—keys to Greece reining in its deficit and continuing to receive needed bailout tranches. Thus, it’s likely Merkel and other EU leaders bow to Greece’s request for flexibility on its bailout terms—as has been the modus operandi for European politicians of late: compromise.
The next round in this Greco-Germanic political tug-of-war seems set for the EU’s June 28-29 summit, where Greek bailout renegotiations formally kick off. Until then, expect a fair amount of political dribbling to continue. Our suggestion, however, is to recall this isn’t the first rhetorical tournament of Europe’s debt woes—in the past, tough talk has uniformly given way to actions in support of the euro. We see little reason to believe the current round-robin will be very different.