Strings Attached

Keeping Watch On Greece

samaras and merkel in berlin_dpa
Walk this way. Greek Prime Minister Antonis Samaras and German Chancellor Angela Merkel.
  • Why it matters

    Why it matters

    Greece was the catalyst for Europe’s debt crisis in 2009. Germany fears it could be again if the E.U. relaxes its control over Athens.

  • Facts

    Facts

    • Greece’s bailout program with the European Union comes to an end this year.
    • Germany is leading a push to offer Greece a credit line to keep some measure of control over Athens.
    • Greece could hold elections in March. Prime Minister Samaras will have to fend off the radical left-wing Syriza party.
  • Audio

    Audio

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Antonis Samaras, Greece’s prime minister, would like nothing more than to tell his country’s voters that his government is finally free of oversight from the European Union and International Monetary Fund, and ideally in time for the snap elections he is planning for March.

Mr. Samaras reportedly said as much during a meeting with German Chancellor Angela Merkel in Berlin last month. Ms. Merkel has some sympathy. She knows that her Greek counterpart is walking a fine line domestically – should Germany tread too heavily, it could tip the elections in favor of the radical leftwing Syriza party, which is currently in the political opposition.

But Germany has no interest in losing total control over Greece, the country that sparked the euro zone’s debt crisis and has received €240 billion, or $303 billion, in rescue funds from the European Union and IMF since 2009. “We have to ensure that we get our money back at some point,” said one high-ranking German government source, who declined to be named.

According to government sources, negotiations are now underway over a credit line that would tie Greece to the European Union beyond this year by offering Athens the option to draw additional E.U. funds if and when needed. The credit line would come from the European Stability Mechanism, the crisis-fighting fund that was set up in the aftermath of Europe’s debt crisis to help countries that are struggling to pay their bills.

“Greece will be very closely guided over a variety of different ways in the future.”

Ralph Brinkaus, Deputy parliamentary leader, CDU

The credit line is needed if the European Union wants to maintain some control over Greece. The existing bailout program with Athens, which allowed monitors from the European Union to inspect Greece’s finances every three months, expires at the end of this year.

All that would be left next year is a less-invasive semi-annual review. Mr. Samaras is also negotiating to end his bailout-program with the IMF at the same time.

For Germany’s policymakers, the key is for the European Union to maintain some pressure on Greece to continue on its path of structural reform – changes that have been very painful for Greece but have also helped pull the country back from the brink of collapse. This pressure should continue regardless of whether there is a new bailout program for Greece or not.

“Greece will be very closely guided over a variety of different ways in the future,” Ralph Brinkaus, a deputy parliamentary leader for Ms. Merkel’s Christian Democratic party, told the Handelsblatt Global Edition. “I think that helps all parties.”

A credit line would be “a very sensible initiative” and is in the interest of both Athens and Berlin, according to Matthias Kullas of the Center for European Policy, a think tank based in southern Germany.  It would allow Germany and the rest of the European Union to keep a certain measure of control over Athens, preventing it from straying from reforms that are still needed.

Such an arrangement would continue what can only be described as a tortured relationship between the two countries over the past few years. Germany, Europe’s largest economy and its biggest financier, has been reluctant to offer taxpayer money to bailout Greece, while Greece has protested – sometimes violently – against the harsh conditions that have been placed on the loans.

“Germany doesn’t necessarily feel comfortable in the role of exerting influence on Greece,” said Mr. Kullas. But “as soon as taxpayer money became involved, it was clear that Germany would want to maintain influence.”

Given the history, the fact that things are looking up in Greece is probably a positive sign.

“That Greece is thinking about how to exit the program, rather than obtaining more aid, is in itself a positive sign and shows that the country is gaining in strength,” Mr. Brinkaus said.

But Germany is not the only one that fears losing control.

Other European countries are also skeptical of the prospect of Greece completely exiting from the E.U. aid program, said one high-ranking E.U. diplomat, who pointed out there are more uncertainties in Greece’s future than just next year’s elections.

The European Central Bank is nearing the completion of a comprehensive examination of European banks. Greek banks could need a fresh injection of funds if they flunk the test. This could complicate Athens’ plans to plug its own budget gaps by using money left over that had been earmarked for its banks.

“As soon as taxpayer money became involved, it was clear that Germany would want to maintain influence. ”

Matthias Kullas, Center for European Policy

The Washington-based IMF has also resisted pulling out of its role. Mr. Samaras hopes to end his program with the IMF early – at the end of this year rather than in 2016 – but it remains unclear whether the IMF will play along.

“There have been significant improvements. But we also believe that going forward and in order to deliver a continuous satisfactory outcome, the country would be in our view in a better position if it had precautionary support,” Christine Lagarde, managing director of the IMF, said last week.

Greece seems to see things this way too. While Mr. Samaras is eager to show he is no longer under the thumb of his E.U. neighbors, a less-invasive credit line from the ESM would act as a calming signal for markets. Yields for Greek bonds have fallen significantly in the past year, but there is a possibility these could rise again should there be a change of government in Athens next year.

Athens has an interest in continuing to get a good deal from investors as it makes a return to capital markets. This need will only become greater if Mr. Samaras plans to exit from an IMF bailout program at the end of this year, one year earlier than planned. An early exit would require Greece to collect an additional €15 billion in new debt from investors instead.

Some of the other European countries than ran into trouble after the crisis, such as Ireland, Spain and Portugal, have reached a point where they can return to the capital markets on their own. Mr. Kallas argues that Greece by contrast is still dependent on getting a backstop from its E.U. partners. Markets expect Greece will get a lifeline from Europe if it gets into trouble again.

“In my opinion, Greece can only refinance itself because capital markets have made a political bet,” Mr. Kullas said. “Greece is still not credit worthy under normal circumstances.”

Ruth Berschens has been Handelsblatt’s Brussels bureau chief since 2009. Jan Hildebrand is Handelsblatt’s deputy Berlin bureau chief. Gerd Höhler is Handelsblatt’s Athens correspondent. Christopher Cermak covers economics and monetary policy for Handelsblatt Global Edition in Berlin. To contact the authors: Berschens@handelsblatt.com, hildebrand@handelsblatt.com, hoehler@handelsblatt.com or Cermak@handelsblatt.com

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