Greece’s Fate Lies in Athens’ Hands, Not Berlin’s

Athens needs to carefully craft ways to comply with the bailout process, not try to change it

By SIMON NIXON

March 29, 2015 4:10 p.m. ET

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One of the Greek government’s biggest mistakes since taking office in January has been to assume that its fate lay in German hands. For the first two months, it refused to deal with the “troika” of international lenders—comprising the European Commission, the European Central Bank and the International Monetary Fund—since renamed “the institutions,” now known as “the Brussels Group.” It was reluctant even to negotiate with the Eurogroup of European finance ministers, which has had political responsibility for overseeing all eurozone bailouts.

Instead, Prime Minister Alexis Tsipras believed that Greece’s fortunes hinged on a “political deal” that pitched Athens against Berlin. Over 10 hours of talks in both Brussels and Berlin, German Chancellor Angela Merkel tried to convince Mr. Tsipras that he was wrong: he had overestimated Germany’s power and underestimated the importance of respecting eurozone rules and processes. Mr. Tsipras may have dug himself into a hole by promising voters that he would end the bailout but Ms. Merkel could do little to pull him out.

That doesn’t mean Ms. Merkel is indifferent to Greece’s fate. Ms. Merkel doesn’t need homilies from anyone on the importance of keeping the eurozone intact. After all, she defied domestic opinion and the advice of senior ministers when she agreed to Greece’s 2012 bailout that prevented a messy euro exit. She said then, and repeated this month, that she believes that “if the euro fails, then Europe fails.” The German government is fully aware that a Greek euro exit could have geopolitical as well as economic consequences.

But Berlin is adamant that it cannot deliver what Athens has been effectively demanding: unconditional loans. For Germany, it is a vital legal principle that the deal struck by the previous Greek government whereby Athens would receive loans—the bulk with 30-year maturities at very low interest rates—in return for fiscal and reform commitments remains a continuing obligation of the Greek state. Greece may have a new government but Athens remains bound by the terms of its bailout in the same way it is bound by its membership in NATO.

Of course, Athens is entitled to seek changes to its bailout program, but it needs the agreement of all the other 18 members of the Eurogroup, not just Germany. True, Germany has considerable power in the Eurogroup, but Berlin has no mandate or authority to negotiate directly with Athens on behalf of the other 17 eurozone states. Nor is it clear it could impose a compromise deal on other eurozone governments, many of which have domestic reasons to be wary of succumbing to Greek pressure.

Besides, finance ministers have delegated the task of designing and evaluating bailouts to the institutions formerly known as the troika. There are two good reasons for this. The first is that finance ministers don’t have the technical expertise to pass judgment on fiscal adjustment packages. Second, it avoids the politically toxic situation where one government sits in judgment on the policies of another, thereby precluding bilateral deals. In this respect, the independence and credibility of the IMF is particularly essential to reassure national parliaments that bailouts have been rigorously designed.

In Berlin—and across the eurozone—there is frustration that Athens spent two months challenging the process, rather than working on the substance of its program. Nobody disputes that symbols are important and that the bailout machinery is widely detested and politically toxic in Greece. But it will be much easier to change symbols and adapt processes once an agreement on substance has been reached.

German officials are still optimistic that Mr. Tsipras can reach a deal with the institutions that satisfies both sides even if they are currently far apart. They note that national governments have always had wide discretion to shape the overall program reflecting their own political priorities; there is always more than one path to the same goal. But what remains nonnegotiable is that Athens’s proposals must be fully evaluated by the institutions, a program agreed and some reforms implemented before any cash can be disbursed.

For instance, if Mr. Tsipras wants to spend more on humanitarian assistance, he could perhaps fund it by cutting spending on defense.

Similarly, if he can raise an extra €3 billion ($3.27 billion) from tackling tax evasion and increasing taxes on the wealthy, it may not need to end the special VAT tax breaks enjoyed by Aegean islands or scale back early retirement opportunities for some public-sector employees.

Of course, this will take time. But Athens has received little sympathy from Berlin over its warnings that it is running out of cash and might be forced into a messy default. German officials note that the date on which Athens says it will run out of money keeps changing. They also note that a determined government can usually find ways to avoid default, if necessary by building up arrears and drawing cash from other state institutions.

The crunch will come in July when Athens must repay €3.5 billion to the ECB. Meanwhile, the liquidity squeeze is putting necessary pressure on Athens to negotiate.

In the past week, there are some signs this pressure is working. Eurozone officials say that for the first time there has been constructive engagement between Athens and the institutions. Athens has submitted a list of proposed reforms that provide a basis for discussion, though details remain so far inadequate and technical teams are still hampered by the refusal of Athens to allow them to talk directly to ministers, officials familiar with the negotiations say.

What is clear is that the decisive moves in this saga will be made in Athens, not Berlin. Mr. Tsipras campaigned on a promise to keep Greece in the euro but also to change the eurozone. Now it is clear he cannot do both, his challenge is to reach a deal with the institutions and then sell it to his party and Parliament. That makes this crisis a far bigger test of Mr. Tsipras’s political skills than those of Ms. Merkel.

Write to Simon Nixon at simon.nixon@wsj.com