A desperate battle was fought last week. It pitted Germany and Greece against each other. Each country had everything at stake. Based on the deal that was agreed to, Germany forced a Greek capitulation. But it is far from clear that Greece can allow the agreement reached to be implemented, or that it has the national political will to do so. It is also not clear what its options are, especially given that the Greek people had backed Germany into a corner, where its only choice was to risk everything. It was not a good place for Greece to put the Germans. They struck back with vengeance.
The key event was the Greek referendum on the European Union's demand for further austerity in exchange for infusions of cash to save the Greek banking system. The Syriza party had called the vote to strengthen its hand in dealing with the European demands. The Greek government's view was that the European terms would save Greece from immediate disaster but at the cost of impoverishing the country in the long term. The austerity measures demanded would, in their view, make any sort of recovery impossible. Facing a choice between a short-term catastrophe in the banking system and long-term misery, the Greeks saw themselves in an impossible position.
In chess, when your position is hopeless, one solution is to knock over the chessboard. That is what the Greeks tried to do with the referendum. If the vote was lost, then the government could capitulate to German demands and claim it was the will of the people. But if the vote went the way it did, the Greek leaders could go to the European Union and argue that broad relaxation of austerity was not merely the position of the government, but also the sovereign will of the Greek people.
The European Union is founded on the dual principles of an irrevocable community of nations that have joined together but have retained their national sovereignty. The Greeks were demonstrating the national will, which the government thought would create a new chess game. Instead, the Germans chose to directly demand a cession of a significant portion of Greece's sovereignty by creating a cadre of European bureaucrats who would oversee the implementation of the agreement and take control of Greek national assets for sale to raise money. The specifics are less important than the fact that Greece invoked its sovereign right, and Germany responded by enforcing an agreement that compelled the Greeks to cede those rights.
I've discussed the German fear extensively. Germany is a massive exporting power that depends on the European free trade zone to purchase a substantial part of its output. The Germans had a record positive balance of trade last month, of which its trade both in the eurozone as well as in the rest of the European Union was an indispensible part. For Germany, the unraveling of the European Union would directly threaten its national interest. The Greek position - particularly in the face of the Greek vote - could, in the not too distant future, result in that unraveling.
There were two sides of the Greek position that frightened the Germans. The first was that Athens was trying to use its national sovereignty to compel the European Union to allow Greece to avoid the pain of austerity. This would, in effect, shift the burden of the Greek debt from the Greeks to the European Union, which meant Germany. For the Germans, the bloc was an instrument of economic growth. If Germany accepted the principle that it had to assume responsibility for national financial problems, the European Union - which has more than a few countries with national financial problems - could drain German resources and undermine a core reason for the bloc, at least from the German point of view. If Greece demonstrated it could compel Germany to assume responsibility for the debt in the long term, it is not clear where it would have ended - and that is precisely what the Greek vote intended.