France Supports Greece in EU Debt Battle

Sympathy in Paris for Athens Adds to Pressure on Berlin

The Wall Street Journal

By MARCUS WALKER,  INTI LANDAURO and  ANDREW ACKERMAN

Updated Feb. 1, 2015 4:42 p.m. ET

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PARIS—France expressed sympathy for the new Greek government’s hope of renegotiating the tough terms of its bailout, amid growing international calls for Germany to rethink its austerity-heavy approach to the debt crises in Greece and Europe.

French Finance Minister Michael Sapin said on Sunday that Greece needs a “new contract” with Europe, backing the demand of the Athens government, led by the left-wing Syriza party, to end the previous framework of Greece’s bailout program, which has become politically toxic in the heavily indebted nation.

His comments—and similar remarks by President Barack Obama —are the latest example of a pushback in Europe and beyond against Berlin’s handling of the eurozone debt crisis. Germany, Europe’s biggest economy, has pressed since 2010 for tight fiscal and monetary policies as the best way to force other countries to adopt supply-side overhauls to make them more frugal and competitive.

But the eurozone’s chronic lack of growth, and a mounting voter backlash against political establishments that have given priority to fiscal retrenchment, are challenging Berlin’s hegemony over economic strategy in the 19-country currency bloc.

The eurozone, second only to the U.S. in gross domestic product, remains the laggard of world economic recovery and is still struggling with the legacies of the global financial crisis.

President Obama, in comments aired Sunday on CNN, echoed Mr. Sapin in urging compromise and said Greece needs “a growth strategy” to deal with a slump in which economic output has shrunk by some 25%.

Mr. Obama acknowledged that eurozone members must have fiscal prudence and structural overhauls, but he said that “what we’ve learned in the U.S. experience…is that the best way to reduce deficits and to restore fiscal soundness is to grow.” The president added: “You cannot keep on squeezing countries that are in the midst of depression.”

German policy makers have gotten used to criticism from Washington, but Mr. Obama’s comments caused a stir in Europe because they came in the context of Syriza’s election win on Jan. 25, and amid fears about whether Greece and Germany will be able to reach a deal in time to avoid a Greek exit from the euro.

And while Germany’s financial clout still gives it an effective veto over many eurozone economic policies, the wind appears to be turning against Berlin. In moves that have worried German policy makers, France and Italy are pressing to slow down fiscal belt-tightening to help economic recovery, while the European Central Bank has announced large-scale asset purchases, known as quantitative easing, in an effort to lift growth and inflation despite strong reservations in Berlin.

It is Greece’s election result, however, that poses the most dramatic challenge to eurozone economic orthodoxy. The small nation’s rejection of mainstream parties that cooperated with German-sponsored austerity has led to a game of chicken between the new Syriza-led government under Prime Minister Alexis Tsipras and northern European creditor governments led by Berlin.

Athens is demanding a new financing arrangement outside the bailout procedures built up at Germany’s behest since 2010. Greece wants a relaxation of austerity, an end to intrusive inspections by a creditors’ committee, and a reduction of the country’s debt burden.

German officials, including Finance Minister Wolfgang Schäuble, are so far insisting that Greece abide by previous bailout agreements, and that no new framework can be offered.

German Chancellor Angela Merkel has made it clear throughout Europe’s long debt crisis that Germany will agree to finance debtor countries such as Greece only if they commit to tough economic overhauls. German officials say privately she is likely to be more open to compromises about the details than Mr. Schäuble, whose hard line on Greece reflects his skepticism about whether Greece is suited to the rigors of euro membership.

Mr. Obama, in his CNN interview, supported the German view that Greece needs major reforms, including to its rickety tax collection.

“But it’s very hard to initiate those changes if people’s standards of living are dropping by 25%,” Mr. Obama said. “Eventually the political system, the society can’t sustain it.” He called for “compromise on all sides” to keep Greece in the euro.

In a comment that echoed some of Syriza’s campaign rhetoric, Mr. Obama said: “When you have an economy that is in a free fall there has to be a growth strategy and not simply the effort to squeeze more and more out of a population that is hurting worse and worse.”

At a news conference with Greece’s new finance minister, Yanis Varoufakis, Mr. Sapin, the French finance chief, said France “wants to show friendship and stand by Greece.” Mr. Sapin, who has previously said Syriza’s election bolsters the case for reviewing austerity in the eurozone, offered to mediate between Athens and the German-led countries that want a harder line on austerity.

“We can be the link that allows Greece and its new democratically elected government to succeed,” Mr. Sapin said.

Sunday’s news conferences with Mr. Varoufakis was demonstratively amicable compared with the Greek minister’s now-famous public clash on Friday with his Dutch counterpart, Jeroen Dijsselbloem, whose government is closer to the German position. Mr. Sapin linked arms with Mr. Varoufakis for the cameras, whereas the Dutch official barely shook hands with the Greek.

Mr. Varoufakis had angered the Dutchman by saying Greece would no longer talk to the so-called “troika” of inspectors from the ECB, the European Commission and the International Monetary Fund, which has imposed onerous retrenchment and overhauls on Greece since 2010.

France, which has lent about €41 billion ($46.24 billion) to Greece through various bailout mechanisms, continues to reject Syriza’s election-campaign demand for outright debt forgiveness. Syriza officials have said they would settle for gentler options for restructuring Greek debt, such as prolonging maturities and reducing interest rates.

Mr. Sapin said Greece’s debt burden would be “only one of the issues that must be included in a new contract between Greece and its partners.” The new arrangement, he said, must “allow Greece to demonstrate its will to reform” its economy.

The Greek government has asked its European creditors for time to present its plans for reforming the country’s economy and public sector, which have long struggled to compete against more efficient and productive Northern European members of the eurozone.

Greece needs to find a way to raise billions in financing by July and August, when Greek bonds valued at about €7 billion held by the ECB fall due. Default on those bonds would almost certainly lead to the ECB cutting off Greek banks from all liquidity support, which would probably force Greece to print drachmas and leave the euro.

—William Horobin and Nektaria Stamouli contributed to this article.

Write to Marcus Walker at marcus.walker@wsj.com, Inti Landauro at inti.landauro@wsj.com and Andrew Ackerman at andrew.ackerman@wsj.com