Europe’s politicians are losing touch with reality. Greece is broke, and yet Brussels wants to send the country billions in new loans, to which there is growing opposition within the coalition government in Berlin. Rescue efforts are hopelessly bogged down by bickering over who will ultimately step up.
Martial music booms from the loudspeakers as warlike images gallop across monitors. A short euro crisis film montage shows police officers being posted in front of the parliament building in Athens and the jostling of frantic reporters, then US investor George Soros uses grim words in an appeal to rescue the euro zone. “The alternative is just too terrible to contemplate,” he says.
Speaking in a panel that follows the short film, German Finance Minister Wolfgang Schäuble, a member of Chancellor Angela Merkel’s center-right Christian Democratic Union (CDU), has a gloomy expression. It is last Friday when the global business elite were at the World Economic Forum in Davos, Switzerland, to discuss the “Future of the Euro Zone.” It becomes quickly apparent that Schäuble would have preferred a different opening than the dark film for this event. The negotiations with Athens’ private creditors are going well, he says, and he points out that he is “quite optimistic” Greececan be rescued.
But later European Union Economic and Monetary Affairs Commissioner Olli Rehn, standing next to the stage, imparts a very different message to reporters. He concedes that Athens needs money once again, but that he cannot yet reveal just how much. Nevertheless, he adds, it is “likely” that the donor countries will have to come up with “a slightly larger contribution.”
Once again, Europe is arguing over a bailout for Greece, and it looks as though the result will be no different that it has been in the past. German Chancellor Angela Merkel opposed lending money to Athens in early 2010, and then the first bailout package for Greece was put together. A year later, she balked at further aid, and then came the second program. Now she is trying to protect the euro zone’s coffers once again, though no one in Berlin or Brussels is willing to bet that she will have more success this time around.
Europe’s politicians continue to battle reality. Everyone knows that Greece cannot repay its massive pile of debts, now at more than €350 billion ($459 billion). But instead of effectively reducing the financial burden, European politicians intend to approve new loans for the government in Athens and go on fighting debt with new debt. “If the country wants to remain in the euro zone, we should support it,” says Austrian Chancellor Werner Faymann.
Though the rescuers may be issuing calls for perseverance, resistance is growing in Europe. In Athens, political parties and citizens are fighting too keep austerity measures from transforming their economic downturn into a full-on crash. And in Germany, the main donor country, leading politicians within the two coalition parties, the CDU and the business-friendly Free Democratic Party (FDP), do not believe that a majority of parliamentarians will vote for additional aid to Greece. “Our position has not changed,” says Horst Seehofer, the chairman of the CDU’s Bavarian sister party, the Christian Social Union (CSU). “There is no money for a standstill in reforms.”
The effort to rescue Greece is clearly moving in circles, and there is no evidence of any progress.
Ironically, only three months ago European leaders believed that things were already on the mend. Greece’s private creditors were supposed to abandon half of their claims, and the partner countries planned to contribute another €130 billion ($172 billion). These efforts were expected to bring the country’s debt level from more than 160 percent of gross domestic product (GDP) to a more tolerable 120 percent by 2020.
But these hopes were deceptive. The Greek economy is shrinking faster than European politicians believed was possible in autumn, and now the country is short on funds once again. The representatives of the so-called troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), estimate the shortfall to be about €15 billion, meaning that Greece needs €145 billion instead of €130 billion. “We do not assume that the additional funds can be collected solely from private creditors,” say sources within the troika.
The only other option is to redistribute the burden. Under the current program, the IMF is responsible for about one-third, and the Europeans for two-thirds of the costs. But obtaining cash is becoming increasingly difficult. A serious dispute over who will come up with the additional money has been raging behind the scenes for days — a dispute that resembles a game of Old Maid.
Politicians Bicker with Banks
The German government feels that the financial sector should bear much of the additional burden. If additional funds were needed, the banks would simply have to contribute more, the Germans argue. The countries involved are already pitching in €130 billion to the new bailout package, and Berlin feels that that ought to be enough.
The banks’ representatives disagree completely. They have already increased their contribution several times, and now they point out that it isn’t just private institutions that hold Greek government bonds. The European Central Bank, for example, holds up to €55 billion in Greek securities. Why shouldn’t the ECB participate in the write-downs, Deutsche Bank CEO Josef Ackermann asks himself?
But Europe’s monetary watchdogs indignantly reject such proposals. They only bought the bonds to maintain the money supply, say officials at ECB headquarters in Frankfurt’s Eurotower. Waiving some of their claims, they argue, would be tantamount to intervening in the fiscal policy of countries. “If we did that, we would be taking on a portion of a country’s debt,” says a central banker. “And we are barred from doing that.”
With such arguments, the monetary watchdogs passed the unwanted baton back to politicians. Last Thursday, EU Economic and Monetary Affairs Commissioner Rehn conceded that the hole in the second bailout package could only be plugged with government funds. The German government was not amused. “Rehn is completely alone in his opinion,” a senior government official in Berlin grumbled. Nevertheless, European leaders know that the countries in the euro zone will not be able to avoid coming up with the funds for new loans to Greece. If there are no other options, says Luxembourg Finance Minister Luc Frieden, “the public sector may have to provide more money.”
Europe is pursuing a Greece strategy of pressing on regardless of the potential cost. Meanwhile, it is becoming increasingly obvious that this method is not helping the country’s economy get back on its feet. Although the Athens government is spending €20 billion less this year than it did in 2009, the debt ratio is still climbing, because the Greek economy will shrink for the fifth year in a row in 2012. And almost all experts agree that the country will not be able to pull itself out of the crisis on its own.
The Dismal Greek Economy
The Greek economy is not productive enough to generate growth. Aside from olive oil, textiles and a few chemicals, there are hardly any Greek products suitable for export. On the contrary, Greece is dependent on food imports to feed its population.
“Greece has been living beyond its means for years,” an unpublished study by the German Institute for Economic Research (DIW) concludes. “The consumption of goods has exceeded economic output by far.”
Especially devastating is the assessment that the DIW experts make about the condition of an industry that is generally seen as a potential engine for growth: tourism. According to the DIW study, the Greek tourism industry concentrates on the summer months, with almost nothing happening throughout the rest of the year. There is almost no tourism in the cities, which translates into low overall capacity utilization and high costs for hotel operators. By contrast, capacity utilization in the hotel sector is much more uniform in other Mediterranean countries.
According to the study, a key cause of the problem is the relatively poor price/performance ratio. In Mediterranean tourism, Greece has to compete with non-euro countries like Croatia, Tunisia, Morocco, Bulgaria and Turkey, which can offer their services at significantly lower prices. The per-hour wage in the hospitality industry was recently measured at €11.39 in Greece, as compared with only €8.49 in Portugal, €4 in Turkey and as little as €1.55 in Bulgaria. The study arrives at grim conclusions, noting that the drastic austerity programs will not only remain ineffective, but will also stigmatize the country as “Europe’s problem child” for a long time to come.
Others in Europe are also noticing that the transformation of the Greek economy is not progressing. This translates into resistance within national parliaments against approving new aid for Athens.
Resistance Mounts in Berlin
This also applies to Merkel’s center-right coalition government in Berlin, in which the first Greece package and the European Financial Stability Facility (EFSF) bailout fund were already hotly contested. Since then, resistance to additional German aid for debt-ridden countries has only grown. “Greece would be the most difficult decision by far for the parliamentary group,” says Florian Toncar, the FDP’s deputy parliamentary leader, who is a member of the party’s pro-European wing. It is already clear that significantly more parliamentarians will refuse to go along with their leadership in the future.
Bavarian FDP member of the Bundestag Erwin Lotter, for example, who has voted for all euro bailout packages until now, would no longer do so in the case of Greece. “I was of the opinion that the Greeks needed time,” he says. “Now I assume that there will be a national bankruptcy, and that the problems cannot be solved with more money.”
There are also serious concerns within the CSU, which has only supported Merkel with great reluctance until now. “The CSU rejects new aid for Greece beyond the approved programs,” says CSU Chairman Seehofer. The CSU wants to hold a European conference on Monday to discuss the subject of Greece. Seehofer has already set the tone: “If the Greeks do not implement the reform programs, there can be no further aid.”
Doubts are also growing within the CDU. “I will not vote for new aid to Greece,” says CDU domestic policy expert Wolfgang Bosbach. “The Greeks don’t lack the political will, but they do lack the economic strength to get back on their feet.” Anxiety is also spreading through the party’s European wing. “A great deal of irritation has spread through the party,” says Gunther Krichbaum, the chairman of the CDU’s Europe committee. “All Greek parties must finally show the unconditional will to make fundamental changes.”
The displeasure at the party base has now reached the leadership of the coalition too. In a move designed to generate good publicity, CDU/CSU parliamentary group leader Volker Kauder has called for sending a European state commissioner to Athens. His FDP counterpart, Rainer Brüderle, is also not mincing his words. “Solidarity is not a one-way street. In this sense, the European Community must remain tough and demand the necessary structural reforms,” says Brüderle. “Only if the Greeks also offer proof that they are serious, can and might we, as the European Community, come to their aid.”
Restructuring with a Crowbar
Perhaps the only purpose of the sharp tone being taken by the parliamentary leaders is to pave the way for the next aid payment. According to the deal these statements are trying to prepare for, Greece will receive new money if it bends to even stricter requirements and conditions. The country is to be restructured with a crowbar.
Experts believe that this recipe is just as unlikely to get the country’s ailing economy back on its feet as the other form of radical therapy currently being discussed: Greece’s withdrawal from the euro. “It is naïve to believe that the problems will be solved if Greece reintroduces the drachma,” says Ansgar Belke, director of macroeconomic research at the DIW and a professor at the University of Duisburg-Essen. The country’s products would become cheaper, but at the same time, the turbulence caused by currency reform would send thousands of companies and banks into bankruptcy. Interest rates could rise, and a bankruptcy would also infect other countries. As a result, says Belke, “the problems of Greece and the euro zone could even become worse.”
Instead, economists recommend finally doing what is already unavoidable: sending the country into an orderly insolvency. Greece’s government creditors, which include the ECB and, most of all, the partner countries that have lent the country money until now, would have to abandon about half of their claims so that the country’s mountain of debt could be reduced to a tolerable level. Then the measures that can return the Greek economy to growth on its own can become more effective: reforms in the labor market, more competition in the service industries and foreign investment.
The majority of European politicians still refuse to recognize reality, though. This is understandable, given that abandoning portions of their claims against Greece would translate into substantial losses. But some government representatives are at least willing to approach the first warm-up exercises. When Luxembourg Prime Minister Jean-Claude Juncker was asked by German financial newspaper Handelsblatt last Friday whether the euro countries should also forgive Greek debts, he replied that such proposed solutions are “not entirely absurd.”