Merkel's Dilemma

Save Greece, but Not at Any Price

TOPSHOTS German Chancellor Angela Merkel (R) and Greek Prime Minister Alexis Tsipras hold their earpieces as they address a press conference following talks at the chancellery in Berlin, on March 23, 2015. AFP PHOTO / TOBIAS SCHWARZ
Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel try and reach an understanding.
  • Why it matters

    Why it matters

    Saving Greece at all costs could backfire, prompting other euro-zone crisis countries to stall economic reforms.

  • Facts

    Facts

    • Greece still has no deal with its creditors; the International Monetary Fund has withdrawn its team from the negotiations.
    • Euro-zone budget rules stipulate that member countries should have a budget deficit of less than 3 percent and debt below 60 percent of economic output.
    • Germany, France and the 17 other countries in the euro zone have repeatedly allowed leeway for euro members to reach these targets.
  • Audio

    Audio

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“Where there’s a will, there’s a way.” German Chancellor Angela Merkel used this phrase again on Wednesday before she met with the Greek Prime Minister Alexis Tsipras.

The saying puts the situation remarkably clearly. She wants to bail out Greece at all costs, no matter how difficult Mr. Tsipras makes her life with his riotous diplomacy.

Ms. Merkel’s statement on Wednesday was an unusual commitment for the Chancellor, who likes to keep all her options open until the last possible moment. So why did she make this statement?

There are two possible interpretations. First, Ms. Merkel has made a decision. Even though many economists and the German finance minister, Wolfgang Schäuble, keep stressing that a Greek bankruptcy and its exit from the euro zone won’t lead to chaos, she is not willing to risk finding out whether the experts are right.

Anyone who allows themselves to be dragged into this game will damage the single currency zone in the long term.

Nor is Ms. Merkel willing to test whether they are wrong as was the case in Lehman Brothers, whose bankruptcy in 2008 caused severe disruption to the financial system. Residual risks, no matter how small, are not a thing Ms. Merkel likes.

The second way of interpreting Ms. Merkel’s statement is much more negative for Greece’s government. The chancellor may have made the remark to publicly demonstrate the strongest determination possible to reach an agreement, because she fears negotiations might break down. It is a precautionary attempt to free the German government and the country from the blame for a Greek bankruptcy. This would also explain why Ms. Merkel only meets with Mr. Tsipras when she is joined by France’s President François Hollande.

When it comes to the negotiations between Greece and its creditors, which will enter a decisive phase this weekend, it would be helpful if Mr. Tsipras didn’t feel too secure. Otherwise, it would be difficult to force him to commit to a sustainable reform plan.

The Greek government’s biggest ally is other Europeans’ fear. Anyone who rules out a Grexit categorically remains vulnerable to blackmail. It was a tactic used by previous Greek governments, but no one uses it as relentlessly as Mr. Tsipras. Earlier this week, he again warned that a Grexit would be the beginning of the euro zone’s end.

Anyone who allows themselves to be dragged into this game will damage the single currency zone in the long term. “Where there’s a will, there’s a way.” The Greek saga has dragged on for five years following this kind of argument.

 

The euro zone, which became 19 members on January 1 with the addition of Lithuania, is expected to continue recovering slowly from its five-year-old debt crisis. The European Commission predicts growth of 1.1 percent in 2015, up from 0.8 percent in 2014. Public debt meanwhile should continue to rise slightly to 94.8 percent of GDP, up from 94.5 percent in 2014.
The euro zone, which became 19 members on January 1 with the addition of Lithuania, is expected to continue recovering slowly from its five-year-old debt crisis. The European Commission predicts growth of 1.1 percent in 2015, up from 0.8 percent in 2014. Public debt meanwhile should continue to rise slightly to 94.8 percent of GDP, up from 94.5 percent in 2014.

 

At the beginning, rescue was necessary. When Greece stumbled in early 2010 and could no longer borrow on financial markets, no one was prepared for such a scenario. The world was still in Lehman shock.

A bankruptcy had to be averted, otherwise the euro zone’s existence would have been at risk. To stave off a crisis the currency region’s rules were bent and broken, for instance the ‘no bail-out’ clause, which forbids a euro country from paying the debt of another member of the euro zone. With some delay, European leaders adjusted treaties retroactively to comply with the reality of the situation.

The emergency measures were controversial right from the outset. Critics warned: Whoever loses control of the wheel and breaks the self-imposed rules will do it again and again.

For rescues of the euro to keep succeeding as they did with Ireland or Portugal, European leaders have to stick to the self-imposed rules.

The current system of bailouts is based on the principle of helping countries to help themselves. i.e., if a country receives billions in rescue funds, it should tackle its own problems. There is no reason to deviate from this rule when it comes to the unruly Mr. Tsipras. Otherwise, what signal would this send to crisis countries which have yet to make extensive reforms?

Five years after the euro crisis, emergency measures should still be bound by law. This also applies to the European Central Bank, which has been bending its rules for months to keep Greek banks afloat with emergency funds. Again, the risk of gradually acclimatizing to this is growing and growing.

If you keep turning a blind eye, you quickly go in the wrong direction. A monetary union can only operate properly when all members stick to the rules. It takes genuine will to help Greece, but Ms. Merkel and her euro partners should not take the route of recklessly ignoring the rules.

 

To contact the author: hildebrand@handelsblatt.com

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