A Greek crisis may well become Germany’s problemThis week the European Commission begins studying Greece’s latest plan for extracting itself from its financial crisis. But although the deployment of the Brussels machinery has taken the edge off the drama, any sense that the problem is now contained would be an illusion. The possibility that a country within the eurozone will get to the brink of defaulting on its sovereign debt remains real.
The new Greek Government’s plan remains incredible, based on a cut in the budget deficit from nearly 13 per cent to under 3 per cent in three years. That implies that Greece would, in one coherent sweep, push through profound reforms of the public and private sectors that it has not yet been able to tackle.
It remains likely, then, that Greece is headed for a crisis that tests the stability of the eurozone. The burden of Europe’s most difficult decision this year would fall on Angela Merkel, the German Chancellor, who would have to decide whether to rescue Greece to forestall a crisis throughout the currency club. But her Finance Minister openly rejects her declaration of a “common responsibility” for other members, and a rescue would be a hard sell to German taxpayers. Even more difficult, a real repair of the eurozone would require Germany to acknowledge that its financial management during the past decade has not been as virtuous as it likes to maintain.
Since October elections, Greece has been in an on-again, off-again crisis, since the new Government restated the budget deficit to 12.7 per cent of gross domestic product. Greece’s public debt is expected to rise this year from 113 per cent to more than 120 per cent of GDP. Markets have greeted with scepticism the assertion by George Papaconstantinou, the Finance Minister, that the plan is achievable. The costs of insuring against a default on debt have risen to the highest levels in six years since the market was launched — or $340,000 for every $10 million of debt annually over five years.
“I just think they can’t do it, and their growth prospects are worse than the Government is predicting,” Simon Tilford, chief economist at the Centre for European Reform think-tank, said. “They need to make cuts, but the country has shown little or no ability to do it” — either to cut the pension costs and early retirement extracted by the unions, to cut waste in hospitals and defence or to curb rampant tax evasion in the private sector.
Even if Greece made the cuts, that would push it into a slump and deflation; crippling for such a highly indebted country. “Whatever happens, it will be miserable for them,” Mr Tilford concluded.
Is this drama useful in helping the Government to haul the country towards this narrow middle course? As Mr Tilford put it: “Without a full-blown crisis, I don’t see how they can do enough.” But it is hard to see that even the present level of tension is manageable by the Government, with unions striking on one side and the markets threatening not to lend more on the other.
Still, the threat of a Greek default may matter even more to the eurozone than it does to Greece itself. If Greece defaulted, other countries with high debt would all face dramatically higher borrowing costs. The eurozone cannot afford to let Greece default, one German hedge fund manager based in London argues. “That’s the lesson of Lehman Brothers; if you let what you think is the weakest link go.” A Greek default would lead immediately to a challenge to Portugal “and that day to Spain, and in a day or two to Italy”, he said.
The terms of a bailout would have to be not too onerous, either. As Mr Tilford put it: “It can’t be more attractive for Greece to default than to comply with the bailout.” But the talk of a bailout, commonplace in the past few weeks, implies that there is a mechanism in place. As officials of the European Central Bank crisply point out, there is not. It comes down to a question for Germany, as the largest economy within the eurozone: whether it would organise an ad hoc arrangement with the bank, helped by France, or even — less likely — a deal only with Greece.
Would Germany do it? Yes, almost certainly. “In Merkel’s generation,” one German fund manager said, “there is still a sense of responsibility for Europe, and that really drives a lot of her decisions.” But not all agree — Wolfgang Schäuble, the Finance Minister, for one, has said that German taxpayers should not have to foot the bill.
In practice, if Germany did, in effect, guarantee Greek debt, the slight widening of German credit spreads would probably not push up the costs of borrowing to a politically painful point. It would be a tough sell for Merkel at home, but, only a few months after the elections, one she has enough capital to win.
But the question still catches Germany at a difficult point in its post-unification fortunes — and raises the question of whether it is prepared to support a wider rebalancing of trade within the eurozone. Merkel (and many other Germans) have taken credit for what they regard as exemplary economic stewardship in the past decade. They have imposed wage restraint and aggressively driven down non-labour costs, enormously improving the competitiveness of exports.
But domestic demand has barely flickered upwards. In the global turmoil, the savings rate has risen, as wage restraint and high unemployment have created fear. “The good news,” one German hedge fund manager, based in London, said, “is the boost in competitiveness. The bad news is the stagnant population, the culture against leverage and home ownership. There is no amount of stimulus that will get a German to spend more in an atmosphere of uncertainty.”
Mr Tilford is even less generous to Merkel and national propensities. “Germans think they have been prudent, they say that Greeks and others should take a leaf out of their book,” he said. “They are nonplussed when others don’t buy into it.” But as he pointed out, the eurozone would be in trouble if other countries did follow the German model. The bias of the German economy towards exports “didn’t cause Greece’s problems, but is an obstacle to a solution. It’s almost impossible to get the economy growing unless you get exports to Germany.”
As Germany wrestles with the question of whether to rescue Greece, it is claiming the moral high ground. But in the end, to ensure the stability of the eurozone in the manner that they say they want, German leaders would have to contemplate big changes at home — not a consequence they appear to have accepted.
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Θέμα: The global credit crunch and its consequences (Αναγνώστηκε 4050 φορές)
10 Οκτωβρίου 2013, 20:50:31