Greek exit is no done deal

By Carsten Nickel

Since the onset of Europe’s crisis, Angela Merkel’s step-by-step approach to managing reform of the eurozone has attracted much criticism, and her government’s resistance to a systemic solution to the crisis has clearly failed to calm markets. For now, no one with real political influence in Berlin is willing to consider any strategic "Plan B" that includes a Greek departure from the eurozone. But when it comes to Greece, Merkel’s insistence on "looking no further ahead than the headlights allow us to see" might actually prove to be a blessing.

The risk is rising, but it’s still premature to expect an imminent "Grexit" from the eurozone. Call it incrementalism or muddling through, but we might be set for many months of more of the same. It’s simply too early to determine yet where Greece, Germany, and the eurozone are headed, in part because Merkel is more flexible and pragmatic than her government’s seemingly relentless insistence on front-loaded austerity suggests.

If and when it becomes inevitable, the Germans will offer concessions to keep Greece in the club. As a measure of Merkel’s flexibility, consider how many agenda items now under discussion appeared to have been ruled out months ago: Talk of a European growth agenda will launch at the Brussels summit in late May, and the Bundesbank has now hinted that it could accept a German inflation rate slightly higher than the eurozone average as part of a macroeconomic adjustment process. Once Greek elections are behind us, Germany might well offer concessions on the timing of the Greek bail-out program.

Berlin calculates that a combination of eleventh-hour German flexibility and rising Greek fear of the potentially catastrophic consequences of Euro exit will persuade Greek voters to back a government that will accept the central German demand: That European financial help will continue to depend on Greece’s willingness to push forward with structural (and painful) reforms.

Think of it as a political trade-off in German politics: To win domestic support for further assistance to southern Europe, Merkel needs assurance from other governments that structural reforms will move forward, assuring German voters that future crises are much less likely. With that reassurance, there is room for Merkel to compromise, even on important details.

Making things easier, Merkel’s support within Germany remains strong. Foreign press and the opposition have cast recent local election losses for Merkel’s Christian Democrats as a protest against her management of the eurozone crisis. But a hugely popular regional prime minister and the rise of the Pirate Party had much more to do with these results than anything to do with the euro, and members of Merkel’s party are still prepared to accept compromise as the outcome of European negotiations. She remains the most popular politician in Germany, and despite public outrage over Mediterranean profligacy, there is still no German majority calling for the Greeks to leave.

None of this can keep Greece in the eurozone forever. Greece’s future will be decided by Greeks. But Germans don’t believe that an imminent Greek exit is inevitable — and neither should we.

Carsten Nickel is an analyst in Eurasia Group’s Europe practice.