Can Greece be Saved?

Greece could still go up in flames.
  • Why it matters

    Why it matters

    Greece’s irreconcilable differences with the rest of the euro zone make a Greek withdrawal from the currency seem more and more likely.

  • Facts


    • Greece was supposed to achieve a primary budget surplus of 3 percent of its economic output in 2015.
    • The ECB will not be buying any Greek bonds under its massive new bond-buying program.
    • Greece’s economic output is a quarter lower than it was in 2008, and unemployment is at 25 percent.
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There is much wordplay to describe the ongoing Greek crisis. At the moment, the one Europe fears the most is a so-called “Grexident.”

Fears that Greece may be forced to exit the euro zone – whether on purpose or by accident – have once again gripped the European continent, and especially the 19 member countries that have adopted the euro.

Despite a temporary aid deal reached at the end of February, officials in Berlin and Brussles fear that a permanent solution to the Greek crisis – one that avoids Greece becoming the first country to exit the currency bloc – is looking further away than ever.

Greece’s budget could slide back into deficit this year, Klaus Regling, the head of Europe’s bailout fund, the European Stability Mechanism, said in an interview with Handelsblatt.

The European Central Bank is not providing much help at the moment. While its president, Mario Draghi, on Thursday said a massive bond-buying program for the euro zone would begin Monday, he acknowledged the ECB will not be buying Greek government bonds.

“The ECB is the central bank of Greece, but it’s also the central bank of all the other countries, and it’s a rules-based institution.”

Mario Draghi, ECB President

Joe Kaeser, the chief executive of Siemens, recently said in Brussels: “I can only warn against throwing the first stone, because you don’t know how many glass houses you will end up hitting.” It is imperative that the monetary union be “preserved in all of its parts,” he added.

But it’s no longer clear whether it will be possible to prevent a so-called “Grexident,” the term to describe a situation in which Greece will be forced to withdraw from the euro zone over irreconcilable differences with Brussels. “The situation has probably never been this dangerous,” warned a senior German government official.

For weeks, “Grexit” — a Greek exit from the euro initiated by Greece or its lenders — had overshadowed the debate over the country’s future in the common currency. But now, observers believe a more passive conclusion could result — where a stalemate between Greece and its lenders, despite their ostensible good intentions, leads to its exit in a “Grexident.”

It’s been five weeks since the left-wing Syriza party came to power in Athens after a resounding election victory. It had promised to end the tough austerity measures that its European and international partners had imposed on Greece in exchange for billions in bailouts.

While a last-gasp deal was reached last week to keep the money flowing, policymakers complain Athens hasn’t stopped attacking its European partners – triggering resentment in the process.

“That isn’t the way people should treat each other,” Mr. Regling said, describing the communication style of Prime Minister Alexis Tsipras and his finance minister, Yanis Varoufakis, as “unacceptable” and “irritating.”

Officials in Berlin took a similar view, with one source saying: “We simply don’t know what the Greeks want.”

The demands shift, according to Berlin officials. Athens has said it is unable to repay its debt, but then claims it doesn’t need any new loans. Mr. Varoufakis brusquely rejects new aid, but then turns around and demands a growth pact for Greece.

By pushing for measures to ease the burden on Greece’s economy, officials fear that Mr. Tsipras is jeopardizing the fiscal policy successes that Athens had in recent years.

Mr. Tsipras has announced new spending measures but so far has been unable to stabilize tax revenues. In fact, Greece – if interest payments are kept out of the picture – was supposed to achieve a budget surplus of 3 percent of its economic output. However, it is now possible “that there could even be a deficit again,” said Mr. Regling.

The Greek economy is also suffering, Mr. Regling noted, warning of “the risk that the competitiveness the country has just regained is being jeopardized.” He cited the government’s announcement that it intends to raise the minimum wage as an example.

Meanwhile, Greece is getting little help from the ECB. Mr. Draghi announced on Thursday that the massive planned bond-buying program would actually begin on Monday, the ECB will not be buying any Greek bonds for the time being.

The country’s banks are also not yet out of the woods. The ECB has increased the volume of emergency loans, but only by another half billion euros. Greek lenders are dependent on these loans, because their customers are currently withdrawing their funds en masse – and also because the ECB is no longer accepting Greek government bonds as collateral in its normal lending operations.

Mr. Draghi on Thursday said the ECB could well raise the limit again, but Athens would have to make some progress on reforms first. He noted that the ECB is already lending the equivalent of about 68 percent of Greece’s economic output to its banks.

“In this sense, one can really say that the ECB is the central bank of Greece, but it’s also the central bank of all the other countries, and it’s a rules-based institution,” Mr. Draghi told reporters.

Mr. Tsipras is coming under growing pressure back home, too.

It is already clear that despite two bailout packages worth a total of about €240 billion ($263 billion), the Greek economy is still in bad shape. The country’s current economic output is a quarter lower than it was in 2008, and the unemployment rate is still a disastrous 25 percent.

The problem is that hardly any of the billions in aid funds were spent on modernizing the country – that is, on infrastructure investment or research programs. The Greek government spends about €6 billion on investments today, or only half as much as in 2008.

Instead, Greece used most of the money to pay off old debts and to rescue Greek banks. The lenders and the governments in Athens averted a national bankruptcy, but the bonanza did nothing to increase prosperity. Only about a tenth of the billions in aid money went into the “normal” Greek government budget.

This is part of Greece’s complaint. Mr Varoufakis has repeatedly argued that Greece could have received less money and used it more wisely if more of its debt had simply been forgiven. European partners argue that there was no other way around the dilemma.

“It isn’t nice that a large share of the financial aid was spent to service debt and recapitalize banks, but that was necessary,” said a government representative in Berlin. After all, the financial sector acts “like an accelerant” – a default in Greece poses a risk of contagion for other euro countries.

In this sense, the Berlin official argued, there was hardly any alternative to the core of the bailout policy. Preventing the Greek crisis from forcing other euro zone members into default was key.

Nevertheless, there is plenty of other more basic criticism of Greece in Berlin, especially of how Athens handled the aid. “Even in Cyprus, the government was significantly more cooperative and stuck to the aid program more closely,” said another government representative.

Wolfgang Schäuble apparently anticipated what would happen. Skeptical that the billions would indeed be used effectively, in the fall of 2012 the German finance minister demanded that some of the aid money for Greece be paid into a sort of blocked account. This would have allowed for more effective monitoring of the use of the funds. But Mr. Schäuble’s idea was not politically feasible at the time.

Meanwhile, there is another special account within the euro bailout fund in which about €10 billion is left over from an emergency recapitalization of Greece’s banks. In their last agreement with Athens at the end of February, the euro countries made it clear that this money could only be used for that purpose.

But money is one thing, while reforms are another. Berlin and Brussels argue that not enough is happening on the reform front at the moment.

“There has been an absolute standstill since last fall,” said an official with the European Commission. “We are looking back at lost months.”

The 60-member Task Force Greece, which includes E.U. employees and experts from the World Bank, OECD and other organizations, is waiting for the government in Athens to finally get back to work.


Ruth Berschens and Thomas Ludwig report for Handelsblatt from Brussels, Jan Hildebrand covers politics in Berlin and Jens Münchrath leads monetary policy coverage. Christopher Cermak also contributed to this story. To contact the authors:,, and

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