The ongoing standoff between Greece and its eurozone peers saw two new developments Feb. 4-5. First, the European Central Bank moved to add pressure on Athens and its lenders to reach an agreement. This was followed by a disagreement between the Greek and German finance ministers on how to deal with Athens' massive debt.
On Feb. 4, the European Central Bank announced the withdrawal of a special waiver that had allowed the bank to accept Greek debt as collateral for liquidity. The measure does not necessarily pull funding from Greek banks because they can still access money from the Greek central bank under the Emergency Liquidity Assistance scheme. However, this scheme is under the control of the European Central Bank, which reviews it once every two weeks, meaning that the European Central Bank could stop the financing at any moment if Greece fails to reach a deal with its lenders. This puts substantial pressure on Greece because, should the European Central Bank block Athens' access to Emergency Liquidity Assistance, Greece would likely have to leave the eurozone and create a new currency to fund its banks. Even if the European Central Bank does not sever Greece's access to funding, there is still the concrete danger of panic and a bank run; Greece is already seeing capital flight.
The European Central Bank's move also puts pressure on Germany. In the coming days and weeks, the German government will go to the negotiating table knowing that there is a real chance that Greece could leave the eurozone. This highlights Berlin's dilemma: Germany needs to keep the eurozone alive because it depends on the currency union for most of its exports, but at the same time, Germany is wary of the political consequences of accepting debt relief for Greece. In other words, Germany has two bad options: Open the door for countries to leave the eurozone, or open the door for countries to renegotiate their debt.
So far Germany has decided to adopt a tough stance on Greece. Since the left-wing Syriza party won Greece's Jan. 25 elections, Berlin has refused any form of debt forgiveness for the country. Berlin recently suffered a political defeat when the European Central Bank announced a program to purchase debt from eurozone members, and German Chancellor Angela Merkel is under pressure from conservative forces within her own government and from the Euroskeptical opposition. German Finance Minister Wolfgang Schaeuble said after a meeting with his Greek counterpart, Yanis Varoufakis, that most of Syriza's proposals run counter to the direction Berlin would like to take. Varoufakis chose a conciliatory tone, asking the Germans for time to come up with a mutually acceptable solution. According to Varoufakis, Athens wants a three-month "bridging agreement" to buy time while all the eurozone members decide on a long-term plan.
This agreement, and the conditions linked to it, will be at the core of the debate in the coming days. Ideally, the European Union would like Greece to extend its current bailout program. But Syriza campaigned for an end to the program and the austerity measures attached to it, and it would be politically difficult for Athens to accept the European Union's offer. Varoufakis' recent moves signal that Athens understands that Greece needs some kind of agreement to keep it shielded while talks take place. Despite its tough negotiation position, Berlin also understands that the integrity of the eurozone is under threat, and with it the whole project of European integration that Germany wants to lead.
As a result, a short-term agreement will likely be reached within the next three weeks. Such an agreement, however, will not end the Greek saga and it will not solve any of Europe's problems. But it will buy the Greeks and their lenders some time — the most they can expect under the current circumstances.