Emerging ‘No’ Vote in Greece Poses Merkel’s Biggest Challenge

German leader’s response will shape future eurozone, but options are limited

The Wall Street Journal

By BERTRAND BENOIT

Updated July 5, 2015 6:03 p.m. ET

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BERLIN—The resounding “no” vote in Greece on Sunday presents German Chancellor Angela Merkel with her toughest challenge since the eurozone crisis broke out five years ago.

Her choice is now between yielding to Greek Premier Alexis Tsipras and sweetening the bailout terms for his country, or sticking to her hard line—and her own voters’ sentiment—in refusing any further concession.

Both avenues are fraught with risks: Watering down the Greek bailout could spark a political rebellion at home and dilute the strict rules the eurozone has assembled in the past five years to ward off future crises.

Refusing to bend could see Greece exit from the euro and unleash economic and political chaos in the country.

Given how much Germany has shaped the management of the crisis—a mixture of emergency loans and unpopular economic overhauls in the affected countries—the strong “no” vote to the terms was a stinging blow.

On Monday, Ms. Merkel was to travel to Paris to consult with French President François Hollande. In a phone call Sunday night, where they agreed “that the vote of the Greek citizens is to be respected,” the two called for a summit of eurozone leaders Tuesday, according to her spokesman.

Yielding some ground on the terms of a new bailout, in particular by pledging some of the debt relief Greece and the International Monetary Fund have been asking for, could still save Greece from a devastating exit from the eurozone.

Yet while such a deal might secure the required approval of the German parliament thanks to opposition votes and those of Ms. Merkel’s Social Democratic coalition allies, it would face considerable opposition in the chancellor’s own conservative ranks. And it would still require a firm commitment to economic overhauls an emboldened Greek government is now unlikely to give.

Conversations with lawmakers in the past week suggest many conservatives might have rejected even the tough terms then under discussion. Any deal that requires lawmakers to pump more taxpayer money into Greece while seeing some of their past loans go up in smoke could spark a full-scale rebellion, lawmakers say.

“For a successful rescue operation, the one who wants to be rescued must let himself be rescued,” Gunther Krichbaum, the conservative chairman of parliament’s European Union Affairs Committee and advocate of a Greek exit from the eurozone, said last week. “As Greece obviously doesn’t want this, there’s no option left for those who want to rescue it.”

When parliament convened last week for a debate on Greece, Ms. Merkel’s cautious speech gathered tepid applause from the conservative benches—nothing like the thunderous ovations that greeted Wolfgang Schäuble, the chancellor’s uncompromising finance minister.

Broader public support for a fresh Greek bailout isn’t guaranteed either. While several polls published last week showed Germans were split on whether Greece should exit the euro, up to three-quarters rejected further concessions to Athens. Mr. Schäuble, the embodiment of German intransigence in Greece, received his highest rating ever.

A sweetened bailout could be particularly damaging for Ms. Merkel because it would invalidate the very rationale for Germany’s approach to the crisis: that it can only be fixed if uncompetitive economies are rebuilt and the eurozone’s fiscal rules never bent again.

In case of a Greek exit, German voters are sure to put the blame largely on Mr. Tsipras, as recent polls indicate they have done so far.

Given all that, principles and an instinct for self-preservation may persuade Ms. Merkel to opt for the second option and stick with her tough line, an outcome many analysts see as more likely.

In a research note published on Sunday, Deutsche Bank said the most probable result of a “no” vote would be the end of Greece’s euro membership, followed by the toppling of the Syriza government as economic hardship mounts.

Berlin officials have also warned about this scenario in case of a no.

Mr. Tsipras had “destroyed the last bridges across which Europe and Greece could have moved toward a compromise,” Vice Chancellor and Economics Minister Sigmar Gabriel was quoted as saying in an interview with the Tagespiegel daily, to be published on Monday.

Write to Bertrand Benoit at bertrand.benoit@wsj.com