hms iron duke

hms iron duke

Wednesday, 15 February 2012

Who Will Pay for Greece?

Alphen, the Netherlands. 15 February. “Bring your desires down to your present means. Increase them only when your increased means permit”, Aristotle once famously wrote. He could have been talking of Greece today. Eurozone finance ministers should today have been meeting to rubber stamp a €130 billion ($170bn) bailout for Greece from the European Union and International Monetary Fund. Instead the bailout is on hold primarily because Germany and other northern European states are not at all convinced that the Greeks will follow through with the package of cuts demanded in return for releasing the money.

Unfortunately, the cuts demanded by Greece’s Eurozone partners seem now beyond bearable for a Greek people long accustomed to being subsidized by their fellow European citizens. They have a point; under the austerity plan the already small minimum wage will be cut by a further 20% to around €600 ($700) per month as prices soar with some 150,000 public sector jobs due to be cut. Put simply, someone is going to have to pay for the Greeks because if Greece is forced out of the Euro the very stability of Greece will be at stake. Indeed, if Greece were forced out of the Euro on a Friday and the New Drachma started trading on the global capital markets on a Monday it would probably have a life-expectancy of around five seconds. Greece will thus need to be subsidised for many years to come – either to keep the Euro afloat or to prevent dangerous political instability on Europe’s periphery.

Right now the Germans want a written assurance from Antonis Samaris, the leader of the New Democracy Party, which looks likely to prevail in April’s elections, that he will honour an extra €300 million of cuts on top of the €3 billion already demanded. It is a fair question as attempts thus far by Athens to sell off state assets have been derisory. That is why the EU’s Economics Commissioner Olli Rehn has called on Greek officials to “take ownership” of the crisis. Sadly, Greek leaders continue to believe they can get away with promising much and then doing little or nothing. It is an old Athenian game.

Equally, there are other more structural forces at work that suggest many in Germany would prefer Greece pushed out of the Eurozone so that the problem can be ‘globalised’. That seems to be behind the emerging schism between Chancellor Merkel, who still sees the resolution of the Greek tragedy as essentially a European political problem, and her finance minister Wolfgang Schauble who sees the problem as an insoluble financial catastrophe and wants to shield the German taxpayer from the consequences by getting others to pay. Certainly, if Greece remains in the Eurozone the German taxpayer will indeed have to subsidise Greece for many years to come, supported by Dutch, Finnish and other northern European taxpayers (i.e. me). Schauble’s position has been reinforced this morning by news that the German economy shrank by 0.2% during the last quarter.

There is also a wider issue of political philosophy which speaks to the very viability of the European Union. A good friend of mine who is also one of Germany’s leading political commentators once told me that Germans lack any real sense of solidarity. What Germans really want, he said, is more Europe for no more money, so long as more Europe means more Germany. This crisis is revealing his words to have been wise.

This confluence of cost and political philosophy are already stoking tensions between Germany and France. The French want the money released to Greece quickly because French banks are so exposed to Greek debt. France would also be happy to shackle Germany with Greek debt for many a year to come. This would establish a precedent for all future bailouts should the Greek contagion really spread to Italy, Spain and Portugal and to which French banks are equally exposed. Whilst the Germans seem to be shifting towards the idea that Greece could default and the Euro survive, the French still see such an event as an impending disaster. Either way it is one hell of a gamble.

The sad reality is that unless there is a real game-changer Greece is now locked into a death-spiral of excessive debt, economic depression and massive budget holes from which there seems little chance of escape. One possible game-changer is that the Greek diaspora, amongst whom are some of the world’s richest people, step into to take ownership of their ancestral homeland in its hour of need. There is little sign of that happening thus far.

My bet is that Greece will indeed receive this tranche of my taxes to keep it stumbling on within the Euro for another year or so but that the real crisis will come in 2013, when the Greeks have failed to follow through with cuts in the face of mass public protest. By then the Germans are hoping that sufficient growth will have returned to Eurozone economies and with it a Euro sufficiently strong to survive a Greek default. The fundamental question thus remains not if Greece defaults, but when, and of course who Greece takes down with it.

Thucydides writing of the death of that great Athenian Pericles once said, “…wealth we employ more for use than for show, and place the real disgrace of poverty not in owning to the fact but in declining the struggle against it”.

All the Greeks are buying with this bailout is time for Germany.

Julian Lindley-French

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