Next to the ongoing crisis in eastern Ukraine, the possible withdrawal of Greece from the European Union (Greek Exit = Grexit) is one of the most important top-level political issues in Europe right now. A lot of people have written about the broad dynamics already, so I will keep my summation short.
A leftist government led by the Syriza party was elected last month in Greece. The government, led by a man named Alexis Tsipras, was elected on a platform largely consisting of changing the terms of the bailout of Greek financial institutions by the European Commision, the IMF, and the European Central Bank (the so-called Troika). The terms of the bailout imposed on the Greek government include very harsh austerity measures, and the Greek economy has been pretty much wrecked for years. Greece wants some combination of loan deferrals and loan forgiveness. Other European countries, particularly Germany, are not keen on changing the terms.
The Economist has an excellent summary of the political and economic background, but I want to focus on the less technical and admittedly more speculative topic of whether European leaders (i.e. Germany and Merkel) will agree to negotiate a compromise, or whether Tsipras will make good on his implied threats and pull Greece out of the EU.
The German Way
I think the core of the disagreement comes down to two competing viewpoints. The way the Germans think about it, agreements made in good faith should be honored. Just because you don't like the terms of a deal that your predecessor signed does not mean that you can arbitrarily renegotiate it a few years after the fact.
Even more than that, the German leadership feels that membership in the European Union comes with certain obligations regarding the structure of public finances and what you're allowed to do regarding debt accumulation. Greece failed to meet these obligations up until now, and is living with the consequences. Allowing Greece to avoid these obligations is rewarding bad behavior, and incentivizing other countries (here's looking at you, Spain and Italy) to break the rules as well.
From this viewpoint, whatever pain the Greek people are feeling is unfortunate, but ultimately a result of their government's misbehavior. If this is what it takes to teach Greece to manage its public finances, then so be it.
The Greek Way
I think the Greek perspective essentially comes down to this: The Greek people have suffered enough, austerity clearly isn't working, and if economic ruin is the price of entry to the EU then we are not interested in remaining members.
The fundamental issue from this perspective isn't about rules or public finances. It's about the European Union as a legitimate governing authority. Joining the European Union means that countries give up control over monetary policy, but should it also mean that they lose control over fiscal policy? Should the Greek people be forced to continue to suffer for the foreseeable future, with their national government unable to ease monetary policy or increase domestic spending?
Room for Compromise
These perspectives aren't really in direct opposition. Neither is a direct answer to the other. It's more like they're on different train tracks altogether, with leaders from each side screaming at the other through the windows as the locomotives whizz past one another.
I think, maybe counter-intuitively, that this means that there is actually a lot of room for compromise. It would be crazy for Germany to not accept that economic conditions in Greece are terrible, and that austerity measures are unlikely to start magically working now when they haven't before. There is a lot of wiggle room regarding repayment schedules, and because Greece's debt repayments are so far beyond what they can realistically pay, there is also room for loan forgiveness.
On the Greek side, it would also be crazy to peace out of the EU if only some, rather than all, of their demands are met. Being in Europe is a pretty good deal in non-crisis times, particularly when you start thinking of the economic costs of leaving.
I understand that Tsipras has got to look tough for the Greek voters who elected him by winning some sort of compromise. And Merkel also has to show the German public that she isn't letting the "fiscally irresponsible" Greeks run the show. But once you get past the political posturing, both Tsipras and Merkel really would prefer that Greece remain in the EU.
The most likely scenario over the next months is Europe once again slogging through a crisis like it did from 2008 through 2012, never letting things get to the point of no return while simultaneously avoiding the kinds of hard decisions that might actually prevent future crises.