Europe and Greece Are at War Over Nothing

What does Germany want from them?

Photographer: ANGELOS TZORTZINIS/AFP/Getty Images

Even by the demanding standards of European dysfunction, the continuing standoff between Greece and the other euro countries is impressive. On substance, the distance between the two sides has narrowed almost to nothing -- yet the stalemate and the risk of a new financial crisis drag on as if it were vast. The EU is staking the future of its monetary union not on principles but on semantics.

Greece's Fiscal Odyssey

Initially, the new Greek government was at fault for making reckless election promises and presenting these to its European Union partners as non-negotiable. It has since climbed down a long way -- in particular, dropping its demand for big debt write-downs. Now it wants a new bailout with softer terms and a temporary arrangement to bridge the financing gap between the present deal and the new one. Reportedly, it's even willing to call this bridge an "extension." 

With Germany's government leading the demand for strict propriety, Europe's response has been to say that the current program must be successfully concluded, perhaps with some flexibility, before anything else can be discussed.

So here's the puzzle. What's the difference between an extension that's a bridge to a new program and an extension with flexibility pending agreement on a new program? To the sane observer, too little to care. Yet because of this difference, whatever it may be, the euro system threatens to break apart.

Funny, isn't it, that Europe's voters express growing disenchantment with the whole project?

The situation is all the more absurd because the details of any transitional provisions don't much matter anyway. What's crucial are the terms of the new longer-term agreement -- which the EU is refusing to discuss until Greece capitulates.

The need for a new deal isn't seriously disputed. The existing bailout imposed too tight a fiscal squeeze, which held back growth. The country's debt burden therefore failed to shrink as intended in relation to gross domestic product. The error has been widely acknowledged, including by the International Monetary Fund (one of the plan's architects) and by other EU governments.

Designing new terms won't be easy, but the case for a gentler program is compelling. Citizens of Greece have already suffered greatly. Output is a quarter below its peak before the crash and unemployment stands at 25 percent. The country's compliance with the terms of the existing bailout, though far from total, has been impressive. "Greece has gone from having the weakest to the strongest cyclically-adjusted fiscal position in the euro area in just four years," the IMF said last summer. "This is an extraordinary achievement."

Extraordinary to a fault. And an unamended extension of the existing program would leave Greece committed to tightening fiscal policy even further over the next two years. In the recent Greek election, voters rightly rejected this bleak prospect -- electing the left-wing government that the EU, IMF and European Central Bank (which make up the so-called troika of economic supervisors) now find so infuriating.

Germany's blockheaded rigor requires the new Greek government to nakedly break all its election promises. That's fine with Germany's finance minister, Wolfgang Schaeuble, who seems to think Greece's voters need to be punished for their lack of judgment. If they and their popular new government are humiliated, a far-right party even less palatable to the rest of the EU stands ready to give it a try. Meanwhile, the risk persists that an avoidable financial collapse in Greece will put other euro members under renewed strain.

The EU's refusal to come to terms with Greece -- to accept concessions short of unconditional surrender -- doesn't serve its interests. There's no need for this impasse to end in disaster. If it does, Germany and its supporters will be more to blame than Greece.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.