As Greece and EU Clash, Clues on Deal Emerge

Despite Finance Ministers’ Frosty Exchanges, Prospects Seen for Sharing Pain Between Athens and Creditors

The Wall Street Journal

By MARCUS WALKER,  STELIOS BOURAS and NEKTARIA STAMOULI

Jan. 30, 2015 7:10 p.m. ET

41 COMMENTS

ATHENS—Greece’s finance minister and a representative of its European creditors exchanged grimaces, tough rhetoric and a frosty farewell on Friday, capping a week in which Athens’s new antiausterity government roiled its eurozone paymasters almost daily.

But behind the acrimony, clues are emerging about how Athens and its German-led creditors are searching for a deal that keeps Greece in the euro.

The options for a compromise, likely to become more concrete once negotiations get under way in February, include tweaking Greece’s budget constraints and debt-service burden while revamping how Europe monitors Greek compliance.

At a news conference on Friday, Greece’s outspoken new finance minister, Yanis Varoufakis, clashed over the way forward with his Dutch counterpart Jeroen Dijsselbloem, who heads up meetings of eurozone finance chiefs.

Mr. Varoufakis dismissed Greece’s hitherto-strict bailout regimen as “based on an anti-European logic,” visibly angering the Dutchman, who warned Greece against “unilateral steps and ignoring previous arrangements.” The two men left the room after a perfunctory handshake.

Spats on topics ranging from finances to foreign policy have gotten relations between Greece and the rest of the eurozone off to a rocky start since the left-wing Syriza party won Greek elections on Jan. 25.

Despite the bad atmospherics, Syriza officials said in private they know they will have to offer a convincing package of economic overhauls and budget discipline in return for financial concessions that will likely fall far short of the party’s bolder ambitions.

Nearly all parties to the latest flare-up in Europe’s debt crisis want to avoid the consequences of failing to reach agreement: Greece would run out of cash, at the latest by July and August, when close to €7 billion ($7.9 billion) worth of Greek bonds held by the European Central Bank fall due.

A default on the ECB’s bonds would most likely end Greek banks’ access to central-bank liquidity, forcing the country out of the euro. Massive economic dislocation in Greece, tens of billions of euros in loan write-offs for creditor countries, and a lasting destabilization of Europe’s currency union could follow.

“Nobody wants Greece to default,” said Megan Greene, chief economist at Manulife Asset Management and a longtime eurozone-crisis consultant. “That’s the reason to be hopeful.”

A deal in coming months is far from certain. A chasm currently separates Syriza’s demand to renegotiate the bailout from Europe’s insistence on continuity.

The lack of personal or political affinity between Europe’s ruling establishment and Greece’s rebel government under Prime Minister Alexis Tsipras could hinder the search for common ground, analysts warn.

Since Syriza’s election triumph, Mr. Tsipras has angered Berlin and other European capitals by picking the nationalistic Independent Greeks as his coalition partner; reversing previous austerity and privatization steps; and disputing a European leaders’ communiqué that blamed Russia for the latest escalation in the war in Ukraine.

Hints that Greece under Syriza might lean more strongly toward Moscow have made Europe’s foreign-policy elite as nervous as its financial crisis managers this past week.

The choice of Mr. Varoufakis as finance minister also went down badly in Berlin. The sharp-tongued economist, fresh from teaching at the University of Texas at Austin, has long lambasted Germany’s approach to the European crisis, describing austerity as “fiscal waterboarding.”

Yet European policy makers and advisers who have begun studying the nitty-gritty say compromises, while difficult, appear possible on the central issues. Those include how tight a budget Greece should run; whether to rejigger Athens’s debts to other eurozone governments; which broader overhauls Greece’s economy needs; and how creditors should supervise agreed-to policies.

“On the economics, there is room for compromise,” said a senior German official. “The question is the politics: What can Syriza live with, and what can get through parliaments in Germany, Finland and elsewhere?”

Publicly, Syriza has demanded a major restructuring of Greece’s bailout loans, but in private, Greek officials say they are hoping for a repetition of concessions Europe has previously made: extending loan maturities and trimming and postponing interest payments.

That would allow Greece to spend a little more and tax a little less than under previous plans, giving its depressed economy some oxygen. European officials say Syriza will still have to curtail some of its spending promises.

Syriza is expected to present its detailed economic policies to Parliament on Feb. 7-9, aiming to convince creditors that it can be trusted to reform the country.

European officials say Syriza’s declared reform goals so far—including tackling corruption, tax evasion and cartels—are welcome. But, they say, Greece still needs major surgery in areas Syriza is reluctant to tackle, including the costly pension system.

One of the biggest obstacles is the bailout process itself—typically for the European Union, which often turns thorny political issues into bureaucratic ones.

Since the eurozone debt crisis erupted in 2010, German Chancellor Angela Merkel has insisted on a set of strict bailout procedures that make loans for debtor countries more palatable for German public opinion, but that have become politically toxic in crisis-hit countries.

At Friday’s news conference, Mr. Varoufakis underscored Greece’s refusal to work any longer with the so-called troika of inspectors from the International Monetary Fund, European Commission and ECB. The three institutions have made Greece implement spending cuts and tax increases worth over 30% of gross domestic product in the past five years, according to Greek and EU data.

So far, creditor countries have maintained a hard line, led by German Finance Minister Wolfgang Schäuble, who said in Berlin on Friday that Germany stands ready to offer Greece solidarity within the existing bailout framework, “but only in this framework and in no other one.”

In private, eurozone officials say a new monitoring system is likely to be needed to replace the troika. Its membership and modus operandi may well change, but the tricky part will be satisfying both Germany’s desire for controls and Greece’s desire to take ownership of its own policies.

Mr. Schäuble has long been a skeptic about whether Greece can repair itself enough to ever thrive in the eurozone, according to people familiar with his thinking. He is unlikely to signal any flexibility toward Greece before Feb. 15, when a state election in Hamburg could show gains for the antibailout party Alternative for Germany, one of these people said.

Ms. Merkel is more pragmatic than her finance chief, the history of Europe’s crisis suggests. In 2012, when Greece came close to a euro exit, Ms. Merkel overruled Mr. Schäuble and opted against pushing Greece out, fearing incalculable fallout. She remains against a “Grexit,” but she needs a cooperative government in Athens that can make Greece more frugal and competitive. Without one, she can’t sell continued financial support to Germans, Berlin officials say.

“Neither side will get its way entirely,” said Ms. Greene of Manulife. Syriza will have to give way on many issues, but “Germany can’t dogmatically stick to what’s been put in place previously, or you’ll get an outcome that nobody wants,” she said.

Write to Marcus Walker at marcus.walker@wsj.com, Stelios Bouras at stelios.bouras@wsj.com and Nektaria Stamouli at nektaria.stamouli@wsj.com

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