COMMENT

The Greek-German breakthrough that didn’t come

The third and final part of our look back at Chancellor Angela Merkel’s relationship with Athens explores the Samaras years and SYRIZA’s win By Yannis Palaiologos

Even after the formation of the pro-bailout government under Antonis Samaras following the June 2012 elections, eurozone hawks continued to press for a clean break from Greece. The same pressure was also being applied within the German government: The “infected limb” camp, led by Finance Minister Wolfgang Schaeuble, tried to convince Chancellor Angela Merkel that a Greek exit from the eurozone was not only manageable but also in Europe’s long-term interest.

This was the time the so-called Plan Z (leaked to the Financial Times last year) was also put forward. The circle of officials who knew about this contingency plan for handling a Greek eurozone exit was tiny. Joerg Asmussen, Germany’s former state secretary at the Finance Ministry and a member of the European Central Bank’s executive board since the start of 2012, was one of its main overseers. Asmussen had briefed Merkel on the plan, but the Chancellery had played no role in designing it.

In the opposing camp were those who feared a domino effect, arguing that a Greek exit would lead to the collapse of the eurozone.

Asmussen and Merkel’s former adviser, Bundesbank chief Jens Weidmann, told the chancellor that they could not know which of the two camps was right. They questioned whether it was possible to shield Portugal from possible Grexit. Merkel became convinced that the risks of a rupture were unpredictably high. By the time she returned from her summer hiking holiday in northern Italy in mid-August, the chancellor had decided to put an end to all discussion of a Greek exit. However, she still needed a partner in Athens she could count on. A few days later she was due to meet with Samaras in Berlin, to ascertain whether he was someone she could do business with.

Rebuilding trust

The Samaras-Merkel relationship had gotten off to a bad start. Merkel was deeply frustrated by the Greek premier’s insistent opposition to Greece’s original bailout agreement, as well as to the mid-term agreement signed in June 2011. In a meeting of the European People’s Party (EPP) on June 23, 2011, the chancellor had been among those who hammered Samaras for his anti-memorandum stance.

The first cracks in the ice appeared in early March 2012, following the approval of the final terms for the writedown of privately held Greek debt. In a rather formal meeting between the two on the sidelines of the EPP meeting, Merkel and Samaras agreed on the need for a channel of communication between their respective staffs. Over the next few months, the two sides developed a better understanding of one other’s positions, setting the foundations for future cooperation. At the top level, relations improved when Merkel called Samaras personally to inquire after his health after he underwent surgery in June for a detached retina. Merkel told her Greek counterpart that her father had suffered from the same problem.

The Berlin meeting was scheduled for August 24. The Greek side, knowing that Athens’s credibility was seriously damaged, mainly because of delays in the implementation of agreed-upon measures, was determined to convince the Germans that it was ready for action. However, in a press conference ahead of the meeting, which was attended by Schaeuble, the Germans could not hide their skepticism. Samaras vowed to push ahead with the pending reforms and arranged a meeting between Schaeuble and Greek Finance Minister Yannis Stournaras for an initial detailed discussion. At the same time, he also stressed to Merkel the need for a stop to all speculation regarding Greece’s future in the eurozone. Members of the Greek negotiating team were surprised to see Merkel dash off to adjust her makeup ahead of appearing with Samaras before the press.

In the dinner that followed their meeting, Samaras’s anti-memorandum rhetoric before his election became a topic of discussion. According to one report of the conversation, the Greek leader said that things had “changed” and pointed to the appointment of Stournaras as finance minister as proof of the new government’s determination to pull Greece out of the crisis.

“This man is a socialist; the right hand of Simitis,” Samaras apparently said, referring to the former PASOK prime minister. Stournaras corrected him: “A social democrat, Mr President.” Even the usually dour Schaeuble is said to have smiled.

After the dinner, Merkel and Samaras spent about half an hour together, without their staff. In her office, Merkel showed the Greek prime minister graphs pertaining to the eurozone’s competitiveness and noted Greece’s low position in all the indices. She also stressed the absence of a warning mechanism in the Greek public administration to prevent overexpenditure by government agencies. Elaborating on how she saw Germany’s role in Europe, Merkel said that she did not want to become known as the chancellor who lost Greece, but she also made it clear that Athens needed to convince its partners that it would implement the necessary reforms.

Over the next few months that Greece was locked in tough talks with the troika of the International Monetary Fund, European Central Bank and European Commission, Samaras took it upon himself to ensure that the prior actions were implemented. The initial list contained 89 measures, 17 of which proved impossible to implement (Greece’s partners were also convinced of this). The other 72, however, were all passed by November, giving Athens a strong argument for the release of the next installment of bailout funding. Given the weaknesses in the country’s public administration, many obstacles to the implementation of the measures had to be dealt with by the prime minister himself, often in direct communication with mid-ranking ministry officials who knew the issues at hand.

In mid-October, in an active show of support for the Greek prime minister, Merkel made her first visit to Athens since the start of the crisis. Widespread protest marches against her and Germany did not dampen the mood of the visit. Other than public declarations of support, the chancellor also brought the Greek prime minister a gift that he very much appreciated: an album on the history of the university hospital in East Berlin, where Samaras’s father had received his degree as a cardiologist. As a young MP, Samaras had visited Berlin and tried to take pictures of the hospital, only to be arrested by the East German authorities – a story he had shared with the chancellor in a previous conversation.

An agreement was eventually reached by Athens and the troika in November, paving the way for the disbursement of some 44 billion euros, further public debt relief (at the insistence of the IMF) through a buyback, a relaxation of the terms of repayment and, most importantly, a commitment from Greece’s eurozone partners to take additional measures to lighten the country’s debt load. To achieve the latter, the Greek government had to commit to achieving a primary surplus and to stay on the reform path. Concerns of a Greek eurozone exit seemed to be finally evaporating.

A year later, negotiations hit another snag after the IMF, skeptical of Greece’s ability to achieve a primary surplus, demanded new austerity measures for 2014. In a press conference after another bilateral meeting in Berlin, Merkel expressed her confidence in Samaras over the surplus issue and said that the reform drive was gaining momentum. However, when she was asked whether steps would be taken for further debt relief, she said this was an issue that needed to be discussed at a later date.

2014, a tough year

Greece posted a primary surplus ahead of schedule in 2013, strengthening the government’s bargaining position. Meanwhile, as the new year came in, several predictions for 2014 forecast a return to growth after six years in recession.

In April, one day before Merkel’s second visit to Athens, Greece returned to the markets for the first time in five years, borrowing 3 billion euros in five-year bonds at an interest rate below 5 percent.

Greece’s positive image, however, was still overshadowed by the skepticism of the creditors – and particularly the IMF – toward Athens. This translated into hundreds of prior actions and constantly growing demands for further austerity. For the prime minister, this level of surveillance and fiscal maximalism constituted a major political problem.

Yet despite her support for the government, Merkel was not inclined to convince the troika to relax the pressure on Athens. After all, it was she who had insisted back in 2010 on the IMF’s involvement in the Greek bailout, so that there would be a strict and experienced supervisor of the program, not susceptible to political pressure. Furthermore, during her visit to Athens in April, the German chancellor once more avoided making any promises in regard to debt relief.

In their last meeting in Berlin in September last year, in the wake of the “resignation” from the Greek government of general secretary for public revenues Haris Theoharis, a cabinet reshuffle and growing signs in Athens of reform fatigue, the chancellor expressed reservations to a plan presented by Samaras for an early exit from the memorandum and particularly for the IMF’s departure from Greece. Berlin was concerned about Greece’s ability to maintain market access without official support. With snap elections appearing all the more likely in Greece, another crucial factor was the reluctance of Schaeuble (who was not present at that meeting in Berlin) to wrap up the fifth review of Greece’s progress, allowing the disbursement of 7.2 billion euros, which would have considerably strengthened the hand of the next Greek government.

Samara’s argument that his government should be allowed to complete its term in order to avoid more political uncertainty boomeranged on him.

First time with a leftist

What happened next is well known: The review was never completed, elections were triggered and Merkel found herself trying to talk with a new Greek premier who was elected mainly on the basis of his aggressive rhetoric against not only Germany but the chancellor as well. Berlin was surprised by how unprepared SYRIZA was to govern, while the question still hangs in the air in the halls of the German government as to how committed Prime Minister Alexis Tsipras is to Europe.

Nevertheless, the personal chemistry between Merkel and Tsipras has been better than anticipated, and their two meetings in March – the first in Brussels along with other key European leaders, and the second bilaterally in Berlin – proved a turning point in negotiations. Merkel accepted the political nature of the two sides’ disagreement on certain issues and Tsipras came to understand that a political discussion at the top level requires exhaustive technical preparation beforehand.

In one of his first conversations with Merkel, Tsipras invoked the Greek adage that “good accounts make good friends.” The chancellor liked the saying and has repeated it to others. Now, Greece’s future in the eurozone will depend to a significant degree on these bilateral accounts, and the level of pragmatism the two leaders show in the quest for a mutually acceptable solution. Otherwise, Plan Z may be dusted off and put back on the table.

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