Mark Blythe writes:  When the anti-austerity party Syriza came to power in Greece in January 2015, at some point, Europe was bound to face an Alexis Tsipras, the party’s leader and Greek prime minister, because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives.  Despite attempts by the eurogroup, the European Central Bank, and the International Monetary Fund since February 2015 to harangue Greece into ever more austerity, the Greeks voted by an even bigger margin than they voted for Syriza to say “no” once more. So the score is now democracy 2, austerity 0.

When the euro came into existence in 1999, not only did the Greeks get to borrow like the Germans, everyone’s banks got to borrow and lend in what was effectively a cheap foreign currency. And with super-low rates, countries clamoring to get into the euro, and a continent-wide credit boom underway, it made sense for national banks to expand private lending as far as the euro could reach.

The ECB is not only violating its own statutes by limiting emergency liquidity assistance to Greek banks, but is also raising the haircuts on Greek collateral offered for new cash. In other words, the ECB, far from being an independent central bank, is acting as the eurogroup’s enforcer, despite the risk that doing so poses to the European project as a whole. We’ve never understood Greece because we have refused to see the crisis for what it was—a continuation of a series of bailouts for the financial sector that started in 2008 and that rumbles on today. It’s so much easier to blame the Greeks and then be surprised when they refuse to play along with the script.  Is Greece to Blame

David Ignatius writes:  The Greek financial nightmare is a reminder of why countries benefit from having their own currencies. In the old days, a flexible drachma could have been devalued to boost exports and economic growth. But today’s euro trades at a single exchange rate that may suit some of its member nations but not others. For Greece, it has become the equivalent of a straitjacket.

So why doesn’t Greece drop the euro and restore its freedom of maneuver? A cheap drachma would boost exports and tourism — and it might be the easiest means of post-crisis financial adjustment. But separating from the euro zone would mean rewriting thousands of contracts and deals. And it could put Greece in a monetary free fall, perhaps forcing Athens to look east to Moscow, Riyadh or even Tehran for support.

The euro zone’s problem is that although the euro has a flexible exchange rate, it’s a one-size-fits-all currency for the 19 member countries. Local adjustments can be made only through fiscal policies, such as the harsh austerity measures Greece was forced to implement.

The ERM was created in 1979 to encourage monetary stability among European nations, which had formed a free-trade zone in the 1950s. The idea was that each member would peg its currency to a European basket; the national currencies would be allowed to fluctuate several percentage points above or below. The system was known as a “floating band,” an oxymoronic term for a system that, to its critics, combined the worst features of fixed and flexible currency regimes.

If Greece should someday restore the drachma, one question would be whether it should be pegged to the euro. Such an arrangement might seem attractive. Athens could speak of its devalued currency as a hybrid “Greek euro.” And there’s certainly precedent: The currencies of Hong Kong, Saudi Arabia and Venezuela are linked to the dollar; those of Singapore and Malaysia are tied to a basket of currencies.

The problem for Greece is that a euro-pegged drachma would be an easy target for speculators.

What about a completely free-floating drachma, whose price would be set entirely by the currency markets? That might be stable in the long run, but it could lead to wild swings as traders respond to rumors. This sort of unpredictability would be the enemy of the investment and growth that Greece needs.

As Greece is discovering, it’s difficult for small, ailing economies to threaten big, strong ones.

Greece and its creditors need the monetary equivalent of a divorce lawyer who can help reckon the costs and benefits of a breakup. Restoring the drachma would give Greece more flexibility, but at the price of much greater vulnerability. For the euro zone, a Grexit would signal that the promise of monetary union was conditional — and unreliable. Bad divorces happen when each side is too angry for rational decision-making.

George Friedman writes:  The European leaders have backed themselves into the corner they didn’t want. If they hold their position, then they open the door to the idea that there is life after the European Union, and that is the one thought the EU leaders do not want validated. Therefore, it is likely that the Europeans, having discovered that Syriza is not prepared to submit to European diktat, will now negotiate a deal Greece can accept. But then that is another precedent the European Union didn’t want to set.

Behind all this, the Germans are considering the future of the European Union. They are less concerned about the euro or Greek debt than they are about the free trade zone that absorbs part of their massive exports. With credit controls and default, Greece is one tiny market they lose. The last thing they want is for this to spread, or for Germany to be forced to pay for the privilege of saving it. In many ways, therefore, our eyes should shift from Greece to Germany. It is at the heart of the EU leadership, and it is going to be calling the next shot – not for the good of the bloc, but for the good of Germany, which is backed into the same corner as the rest of the European Union.  Greece

Holger Nehring writes:  In the week before the Greek referendum, leading German tabloid BILD conducted its own referendum on what should happen to Greece. The question:“Should we support Greece with further taxpayers’ billions?”, pointed out that Germany had already poured €88 billion down the Greek sinkhole.

Almost 90% of BILD readers voted No. Another poll printed in the same paper on Saturday suggested that 78% felt compassionate towards the Greek population. And 56% believed German would be unaffected by the outcome of the referendum and any consequences this may have.

Like many Greeks, Germans still believe – optimistically – that their government has the sovereignty to make unilateral decisions and that they are shielded against the vagaries of the international economic and financial system. But they are also still keen to show that they are the star pupils in European solidarity: this explains the high levels of compassion for the Greek population. In tune with this the German vice-chancellor, – a social democrat – has just offered to consider humanitarian aid for Greece, should it be required.

What does this mean for German politics? The Greek No is a major defeat for the chancellor, Angela Merkel, both domestically and internationally. Most politicians from Merkel’s Christian Democrats are pessimistic about the possibility of a new deal and many have interpreted the result as a vote against the euro, if not a vote against a European Union. Only the small quasi-socialist Left Party, whose parliamentary party had even supported a previous austerity deal for Greece, and, to a lesser extent, the Greens, also much diminished since the last election, are arguing in favour of Syriza.

All this poses a massive problem for Merkel. She is so far only on record saying cryptically that she “respected” the outcome of the Greek vote, and it is very likely that she will push for further negotiations.

At the same time, Merkel wants to be seen as powerful negotiator, not the deal breaker. Her legacy as a pro-European, the East German who has brought the reunified Germany into a renewed European Union, is at stake. This is why her finance minister Wolfgang Schäuble was the designated bad cop in negotiations. But this will come at a cost: the vast majority of the German population and her own party are pulling her away from clinching a deal

The hard line that Schäuble took towards Greece is hugely popular in the German population. And, if anything, his support base in Merkel’s Christian Democratic Union (CDU) is probably greater than Merkel’s own.

Merkel could wait for a long time, build up the pressure and then use that pressure to clinch a deal at the very last minute, claiming that there was the need to act due to some higher authority, which places a disclaimer on her direct responsibility, just in case.

Merkel now faces the choice of pleasing her electorate and being remembered as the person who finished off a key element of European integration; or trying to rescue Greece, which will stoke euroscepticism in Germany and is likely to reduce the voter base for her party. There is no current alternative to the CDU on the right.. But it is only a matter of time until full-scale anti-EU populism seen in France and the UK will come to Germany.

Merkel’s legacy is tied to the fate of the eurozone. Focused on tactics rather than strategy, Merkel’s way of dealing with things has not worked out well in this context. She has run up against structures that proved immune to her tactics: the highly complex machinery of the EU, with its many committees, forums, lobby groups and difficult decision making, and the popular will of another EU member state.

The crisis in Greece is an economic and financial disaster that may turn into a humanitarian crisis. It is also, fundamentally, a crisis of national sovereignty in the context of the European Union: one popular will is pitted against another, without an effective means of mediating between the two.

Merkel can now show true leadership rather than just tactical manouevres: starting an open debate about the parameters of European integration and about the German model. There is, still, a tiny bit of time left for Merkel to find her moment.

Rebecca Christie writes:  Euro-area leaders and finance ministers meet Tuesday in Brussels to discuss how Greece can stay in the common currency. It’s the first round of serious talks since Greek voters resoundingly rejected the terms of a prior bailout offer that expired on June 30.