How far will Merkel and the EU go in pressuring Greece?

Politico's European edition had a report last week in which EU Commission President Jean-Claude Juncker, who was backed by Angela Merkel in the most recent European elections, sounds like he's trying to distance himself from the recent flood of leaks from officials sources threatening Greece with explusion from the eurozone currency union (Florian Eder and Carrie Budooff, Juncker: ‘There will be no default’ 04/20/2015):

An agreement on a financial rescue package remains distant, Juncker said, but he ruled out a Greek debt default or exit from the eurozone. In an interview with POLITICO, Juncker said his main reason for optimism rests less on any tangible progress than on the simple fact that the alternative is unimaginable.

Speaking from his office in the Berlaymont building, Juncker pushed back on an increasingly commonplace view among eurozone leaders that a Greek default could be a lever to force the Syriza-led government to get serious about its finances, and that its fallout could be contained. He declined to elaborate on the nightmare scenarios he sees potentially unfolding but warned that the failure to keep Greece afloat would “lead us to consequences that people don’t know the amplitude about.”

“We are prepared for all kinds of events but I am excluding at 100 percent this Grexit, or Greek exit,” Juncker said. “There will be no default.”

This remains the Greek government's strategic advantage in the current negotiations. As badly as Merkel may want to pound Greece into continuing the ruinous austerity policies that have the country stuck in a depression with no near-term prospects of emerging from it, a disintegration of the eurozone would cost German banks and would be enormously disruptive for the German economy. It would also remove the level of power Merkel currently enjoys as the Queen of Europe.

It seems to me she will be highly unlikely to go there. If that's the case, the biggest risk is that she will hold out too long before making a deal and a process of disintegration will start that the eurozone will be unable to control.

While dragging out the negotiations puts continuing pressure on Greece, it also gives Merkel some time to minimize the political shock in her own CDU party and among German voters more generally when and if she capitulates on the Greek austerity program. She and her party have recklessly promoted the idea that Greeks were lazy, irresponsible deadbeats and that's the only real problem. Walking that back will require effort and finesse. Both of which she has repeatedly shown herself capable of displaying.

Former German Foreign Minister Joschka Fischer argued back in February that "Merkel seems to be well aware of the unmanageable risks of a Greek exit from the euro – although it remains to be seen whether she can muster the determination to revise the failed austerity policy imposed on Greece." (Angela Merkel’s Moment of Truth Project Syndicate 02/25/2015) He argues just before that something that does not seem obvious from what I've seen: "Merkel – despite her public image in southern Europe – was not aligned with the hawks in her party and administration" on the Greek crisis, implying that she favored milder policies. I'm not sure how he takes that perspective. But his view is worth noticing. He also writes:

The Greek conflict shows that Europe's monetary union is not working because one country's democratically legitimized sovereignty has run up against other countries' democratically legitimized sovereignty. Nation-states and a monetary union do not sit well together. But it is not hard to understand that, should “Grexit" occur, the only geopolitical winner would be Russia, whereas in Europe, everyone stands to lose.

Though the geopolitical risks have, so far, barely figured in the German debate, they greatly outweigh any domestic policy risks of finally coming clean with the German public. Greece, Germans should be told, will remain a eurozone member, and preserving the euro will require further steps toward integration, up to and including transfers and debt mutualization, provided that the appropriate institutions for this are established.

Such a step will require courage, but the alternatives – continuation of the eurozone crisis or a return to a system of nation-states – are far less attractive. (Germany has a new national-conservative party [the Alternative für Deutschland; AfD] whose leaders' declared aim is to pursue a pre-1914 foreign policy.) In view of the dramatic global changes and the direct military threat to Europe posed by Putin's Russia, these alternatives are no alternative at all, and the Greek “problem" looks insignificant. [my emphasis]