Published in Business Spectator (Melbourne), 26 July 2012
Europe’s politicians are quick learners. It has only taken them about 2½ years to realise that Greece cannot be saved within the eurozone. But this timely realisation comes with an enormous bill attached: Greece’s bankruptcy and euro exit will cost central European taxpayers dearly.
Since early 2010 the European Union’s top politicians pretended to have the Greek situation under control. In particular, the Germans set the benchmark in denialism. Angela Merkel’s government has always claimed that not a single cent had been donated to the Greeks as they would eventually repay all the money lent to them. It is not known if Merkel really believed this or whether she just tried to calm the electorate.
In any case, with the latest reports about the IMF pulling out of the Greek bailout, Moody’s downgrading Germany’s outlook to negative, and Germany’s economics minister Philipp Rösler openly talking about a Greek bankruptcy, it is now plain to see that Merkel’s promises were worth roughly as much as a Greek treasury bill.
Greece is going to default – and Germany is going to pay. The only question is how much.
A conservative estimate by the Centre for European Politics sees the direct cost of a Greek default to Germany at €45 billion. Other experts such as Dekabank economist Carsten Lüdemann include potential writedowns in the European Central Bank’s Target 2 system. This would increase the German burden to €83 billion.
But even that may not be the end of the matter. If Greece’s departure triggers a chain reaction across other crisis countries, the potential losses to the German economy become staggeringly high. The Munich based Ifo research institute calculates that the bailouts for Greece, Portugal and Ireland combined with the ECB’s exposure to sovereign plus the Target 2 claims and future commitments to the European Stability Mechanism amount to a total of €771 billion. One can only guess how much of this sum would be lost in case of an uncontrolled breakdown of the eurozone.
For Chancellor Merkel, this means that before too long, and probably within the next weeks, she will have to answer the question she has been postponing for years. Will Germany formally underwrite all of Europe’s debt to buy another few years’ time? Or will the Germans now decide to end the euro experiment and allow the eurozone to fall apart?
Merkel’s room for manoeuvre is getting smaller by the day. Her small liberal coalition partner FDP is openly toying with the idea of pulling the plug on Greece. Her Bavarian sister party CSU fires new broadsides at the euro bailout plans almost on a daily basis. And even her own party now senses that any further bailout commitment to Greece would be electoral suicide. As one German newspaper quotes an unnamed party insider, if that happened Merkel would not need to bother running in next year’s general election.
With that in mind, Merkel will try to avoid a Greek default because it would blow a hole in Germany’s budget. But she dare not ask parliament for yet more money for Greece, at least not before the 2013 election. She may try all sorts of accounting tricks to make the existing bailout funds last longer but even that is getting more difficult. All the tricks are used up. And while time is running out for such juggling, there is still the threat of the Constitutional Court throwing out her government’s euro policy altogether.
To sum it up: Merkel increasingly looks like a lonely king on a chessboard a move or two from being checkmated.
It is a fight the Chancellor can no longer win. Any outcome of the euro crisis will be disastrous for her country. She can only choose between the evils of being bankrupted by the euro staying together or by the euro falling apart. As of today, both options hardly look affordable to Germany, hence Moody’s downgrade.
But whether she wants to or not, Merkel has to make this choice within weeks – at the latest when the troika of EU, ECB and IMF report back on Greece’s austerity program compliance. Then Merkel can no longer evade the question of how to deal with Greece that is so obviously a bottomless pit as long as it stays in the eurozone.
If you thought the crisis could not get any uglier, think again.