European finance ministers are preparing for a showdown over Greece

Varoufakis SchaeubleREUTERS/Fabrizio BenschGreek Finance Minister Yanis Varoufakis and German Finance Minister Wolfgang Schaeuble (L) address a news conference following talks at the finance ministry in Berlin February 5, 2015.

Today’s crucial meeting of European finance ministers to discuss whether to renegotiate terms with the new Greek government over its bailout deal. And the two sides couldn’t be further apart.

On the one side you have a new administration in Athens led by the leftist Syriza party that came to office on the promise to stop the austerity measures required under a memorandum signed with its European partners, the European Central Bank and the IMF in 2012.

Yanis Varoufakis, Greece’s finance minister, has described a number of the reforms agreed under that deal as “toxic” as is calling for 30% of them to be cancelled and for Greece to be granted a bridging loan to allow the new government to prepare a long-term reform programme.

Here are his key proposals:

  • They propose 30% of the memorandum of understanding between Greece and the Troika agreed in 2012 be scrapped in exchange for a commitment to 10 new reforms agreed with the Organisation for Economic Cooperation and Development (OECD).
  • Greece’s primary surplus target of 3% of GDP for this year to be reduced to 1.49%.
  • Reduce Greek debt through a debt swap plan in which current outstanding debt is converted into either GDP-linked bonds, where the interest rates are linked to Greece’s economic growth, and “perpetual bonds” that have no formal expiry date but the amount can be called back by the holder at any time.
  • Introduce measures to ease the country’s “humanitarian crisis” as announced by Prime Minister Alexis Tsipras on Sunday. These include a rise in the minimum wage and the payment of a bonus to low-income pensioners.

On the other side of the negotiating table, however, sits Europe’s largest economy Germany. German Finance Minister Wolfgang Schaeuble has done his uppermost to douse any talk of renegotiating the bailout deal saying, archly, that the country doesn’t have to accept any more bailout money if it doesn’t want to.

On Tuesday he told reporters in Berlin that if Greece refuses to accept the final €7 billion tranche of the current bailout programme then “it’s over”. He also denied reports that the European Commission were looking at granting the Greek government a 6 month extension to the programme saying they “can’t negotiate about something new” and casting doubt on a bridging loan deal.

However, it’s remains unclear whether Schaeuble’s position is really as firm as he wants it to appear going into the negotiations. For a start, the French Finance Minister Michel Sapin said on Monday that Europe “needs to put together what some may call an extension, or the Greeks might want to call a bridge”.

Moreover there are hints that the German government’s line is somewhat less hardened than Schaeuble is suggesting. Speaking at a press conference earlier this week German Chancellor Angela Merkel hinted that some negotiation was possible: “I’m waiting for Greece to come forward with a viable recommendation and then we’ll talk about it.”

What we know is that going into this meeting the Eurogroup is more divided than almost ever before. But for Greece, with an economy which remains around 25% smaller than it was at the start of the crisis and over a quarter of its working-age population still unemployed, bringing the moment to its crisis is a feature, not a bug, of its negotiating strategy.

As Varoufakis told Greek MPs on Tuesday:

“If you are not willing to even contemplate the prospect of a breakdown, then you’re not negotiating. We’re not seeking a clash. We will do everything to avoid it. But you’re not negotiating if you’ve ruled it out.”

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