The Eurogroup meeting between EU finance ministers has broken up for the day and will reconvene on Saturday according to reports.
As noted earlier, Greece is now refusing to agree to the IMF's hardline stance on pension cuts and the VAT, while the IMF isn't interested in a deal that sees Athens escaping long-term fiscal reform by resorting to short-term, unenforceable solutions such as tax hikes.
As EU leaders convene for a two-day summit in Brussels (where it will be all Greece, all day, despite what anyone says), German Chancellor Angela Merkel now looks to be leaning towards drawing a line in the sand consistent with her finance minister, her lawmakers, and her central bank chief.
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This marks a critical turn of events. Until now, Merkel had been relucant to fold under pressure from Wolfgang Schaeuble as the Chancellor viewed the geopolitical risks of Grexit as too great given the situation in Ukraine and recent friction between Europe and Russia including the extension of economic sanctions, an anti-trust suit against Gazprom, and the seizure of Russian state assets in France, Belgium, and Austria.
Now, it appears Merkel's patience has run out, and understandably so given not only the fact that sending a strong message to Greece is critical if Berlin hopes to avoid being drug into similar negotiations with Spain, Portugal, and/or Italy in the future, but also because, as we've explained at length, each ELA cap hike from the ECB effectively adds another billion euros or more to Germany's TARGET2 credit.
As a reminder, here's more on the battle Merkel faces at home (via Speigel):
Schäuble is extremely good at shrugging off conflict with gallows humor -- a gift that has served him well throughout his lengthy career. He is well aware that a handful of Social Democrats aren't the only ones talking about the widening rift in the government. Insiders who know Merkel well are saying the same. The chancellor has to answer one of the hardest questions she's had to face since assuming office, namely, should Greece be allowed to remain in the euro, or should the whole drama be brought to a spectacular close with a Grexit.
Merkel would like Greece to remain in the euro. Not necessarily at any cost, but she's prepared to pay a high price. Schäuble is not. He is of the opinion that a Greek withdrawal from the euro zone is in Europe's best interests..
Schäuble is something of an éminence grise in the German government: He became a member of parliament in 1972, when Merkel was preparing to graduate from high school in Templin. In 1998, as head of the CDU/CSU parliamentary group in the Bundestag, he made Merkel his secretary general, but then became enmeshed in the CDU donations scandal. Merkel succeeded him in 2000.
Although she's the one in charge, he intermittently makes it clear that he remains his own man; that he doesn't kowtow to anyone. Appointed finance minister in 2009, Schäuble remarked that Merkel likes to surround herself with people who were uncomplicated, but that he himself was not uncomplicated. He tends to be a little derisory about Merkel, admiring her hunger for power but deeming her too hesitant when the chips are down.
The euro crisis first drove a wedge between them in 2010, when they disagreed on the International Monetary Fund's contribution to the Greek rescue fund. Schäuble was against it, on the grounds that Europe should sort out its problems by itself. Merkel, however, was keen to enlist the help of a body that has clear criteria when it comes to offering aid, and which would therefore prevent the Europeans from making one concession after another. Merkel prevailed.
But they've now traded positions. Schäuble believes that enough concessions have been made to Greece and he's bolstered by the frustration currently rife in his parliamentary group over Merkel's strategy. It will be hard for Merkel to secure majority support if he opposes her, so her fate is effectively in his hands..
The conflict is not about differences in their respective assessments of the situation.. Where they differ is when it comes to the consequences..
Officially, the differences between Schäuble and Merkel are explained away as a reflection of their respective tasks. It's Schäuble's job to hold the purse strings and Merkel's to keep an eye on what's happening on the international stage. Will Putin be getting a foot in the door if the euro zone cuts the rope on Greece? Will the country turn into a failed state in the middle of Europe if it no longer has the euro?
This isn't just a matter of good cop, bad cop. Unlike Merkel, Schäuble doesn't need to worry about looking as though he doesn't care enough about Europe. He wrote the book on the EU, penning papers on how to intensify the union when Merkel was still only a freshly-minted member of the cabinet. She, by contrast, has often been confronted by accusations that her EU policy is austerity-driven and nothing else. In terms of Europe, she lacks Schäuble's street cred..
Merkel has never been overly bothered about going down in the history books. But if she does end up hounding Greece out of the euro, the development will certainly be more than a footnote. Which is one possible reason for her hesitancy. She, not Schäuble, will be the one who has to deal with the inevitable criticism and attacks.