German vote to be defining for Greece

Greece’s economic weakness over the last decade and the valuable political capital that has been frittered away in dealings with its lenders have left the country vulnerable to even the slightest of shocks from developments outside of its borders.

This is one of the reasons Greeks will be closely following developments in Germany, where elections Sunday are expected to lead to Chancellor Angela Merkel being re-elected for her fourth term but with doubts about who she will govern with.

The euro crisis elevated Berlin into the decision maker as well as paymaster within the single currency area. Since 2010, Greek leaders have tried everything from cozying up to and lashing out at the formidable Merkel, but with little impact.

The conservative leader has never wavered from the path in terms of how to handle Greece. While Merkel may have lacked an overall vision of how to reshape the eurozone and learn from the lessons of the crisis, she was always very clear on what was needed to protect the single currency. This involved Greece going through a painful fiscal adjustment and lengthy reform process, whose targets would be agreed with the troika (now the institutions), while being ringfenced from the rest of the euro area.

Any attempt to deviate from this, for instance by trying to negotiate directly with her met with a polite but firm reminder that details had to be settled with the lenders’ representatives, the ones who had the technical expertise and on-the-ground knowledge to decide exactly what measures Athens needed to take.

However, while the bailouts have largely defined the relationship between Athens and Berlin over recent years, the prospect of Greece exiting its third program next year means this dynamic could change.

Before we reach this point, though, there is a tricky period ahead: One in which Athens will have to complete dozens of prior actions and meet this year’s fiscal targets before its lenders sit around the table again to discuss debt relief, which is such a sensitive subject in Germany.

The leader of the FDP liberal party, Christian Lindner, who was touted as a potential coalition ally for Merkel during the campaign, has been outspoken on this subject. “If there was a debt cut for Greece, as the International Monetary Fund suggests, then we should be open-minded to finally solving the problem,” Lindner said in an interview with Bloomberg at the end of August. “Greece gets a debt cut, the money is gone, but for that Greece has to leave the eurozone, get a new currency of its own which it can devalue and increase its competitiveness in tourism.”

This underlines the complexities that Athens could encounter following Sunday's vote. Experts point out that there could be significant differences in the outlook of the next German government, depending on who Merkel works with. Julian Rappold, a political analyst and project leader at the European Policy Center in Brussels, suggests that a grand coalition between Merkel’s CDU and the social democrats of SPD would probably lead to the latter choosing who becomes finance minister, meaning Wolfgang Schaeuble would be replaced.

“Such a coalition might have a positive twist for Greece,” Rappold says, adding that the SPD’s more favorable stance on fiscal policy and debt relief would have to be balanced against the constraints of public opinion, leaving even a CDU-SPD government with a “slim corridor” of manoeuver.

The German tradition of allowing the junior coalition partner to have first pick of the ministries could spell trouble for Greece if the FDP becomes Merkel’s sole coalition partner. “The liberals have developed a hawkish stance on Greece,” says Rappold. “A black-yellow (CDU-FDP) coalition with a liberal finance minister should be of concern to Greece,” he adds, suggesting that decisions on debt relief, which are due to be taken before Greece’s scheduled program exit in August 2018, may be delayed.

Alexander Kritikos, research director at the German Institute for Economic Research (DIW) in Berlin, says that FDP leader Lindner may even consider the finance minister’s position for himself. “Then we will find out if Lindner’s references to Grexit were just a pre-election ploy to collect votes or not,” he said.

Kritikos says that if the Green Party joins a CDU-FDP alliance, to form the “Jamaica” coalition as it is known in Germany due to the three parties’ colors, the dynamic may change again as the Greens have been in favor of debt relief for Greece.

He also points out another important dimension, which has nothing to do with who will govern with Merkel but with the level of support for the right-wing populist AfD party. “If AfD gets more than 10 percent, there will be an issue on the right,” he says. “The CDU will be concerned about taking steps on debt relief that are deemed too quick or bold as it will want to win back the votes lost to the right.”

Once the new government is in place, apart from debt relief and the completion of Greece’s program, the other issue that will dominate the Greek-German agenda is whether Athens can redefine its relationship with Berlin. If Greece exits its bailout successfully in August 2018 and the debt issue has been settled, the onus will be on the Greek government to build a new type of relationship with Europe’s key player.

Rappold says that developments over the last couple of years, such as the SYRIZA-led coalition courting Russia’s support and the refugee crisis have affected German perceptions and led to more attention being paid to the geopolitical factor. “The awareness of Greece beyond the debt crisis, the role it plays in the debate about Turkey for instance, will become more relevant in coming years,” he says.

“It is up to the Greek government to find new ways of cooperation,” adds Rappold. It is a view that Kritikos agrees with.

“There have been many attempts by German governments to enhance cooperation, such as in the field of research, but the current Greek administration has not moved them forward,” he says, adding that it will be up to Athens to change its approach to such initiatives.

“There is a will on the German side to take steps to help the Greek economy and society,” says Kritikos, who points out that the potential success of the investment made by German giant Fraport in 14 regional airports in Greece could provide a positive example of Greek-German cooperation to build on in the years ahead.