Merkel’s U-turn on Greece reveals Germany’s real motivation

Published in Business Spectator (Melbourne), 8 January 2015
Republished in The Australian (Sydney), 9 January 2015

In my last column of 2014, I wrote that European leaders usually pick the least appealing policy option and still manage to make it worse (A Greek olive branch for Steve Keen, 18 December). Maybe that was a premature assessment. It now looks as if they are about to take a good option and turn it into a disaster regardless.

It has been clear for long time that Greece would be better off outside the eurozone. In fact, the country should never have been admitted in the first place. So, indications that the German government is (finally) prepared to let Greece depart from the monetary union are certainly a step in the right direction.

The way the Germans are going about their policy U-turn on Greece’s euro membership is nevertheless shameful. Not only does it unmask any previous pretence of European solidarity, it also risks destabilising Greece in the run-up to its elections on January 25.

On Monday, German newsmagazine Der Spiegel reported that Chancellor Merkel’s government believes that a Greek exit from the eurozone would now be manageable without posing greater risks to other countries. Of course, the Germans dutifully delivered their official denials, stating that their official position had not changed and Greece should keep the euro — and its obligations to pursue austerity.

Der Spiegel’s well-informed story appears far more plausible than any denial. German patience with Greece is running out anyway but the prospect of having to deal with an openly hostile Greek government led by the Syriza party would be the final straw. Not even Chancellor Angela Merkel would manage to explain to the German public why her country should continue to support Greece without any concessions in return.

There is, however, another side to the story about Merkel’s change of mind on Greece. The possibility of an anti-austerity government in Athens offers the perfect excuse to walk away from previous commitments to keep Greece in the eurozone at all costs.

Since the beginning of the Greek drama, Merkel and her government routinely elevated Greece’s euro membership to a question of war and peace, a symbol of pan-European solidarity and talked about the irreversibility of the ‘grand European project’. To be sure, such rhetoric was always exaggerated and should have never been taken at face value, but now we can see the real reason why Germany initially opted to keep Greece in the eurozone. It had little to do with lofty idealism.

There were two very practical considerations that influenced Merkel’s decision not to let Greece depart immediately. The first was fear of contagion. Greece, as small as it is, was believed to be important enough to infect other European economies if it exited from the euro. With the firewall of the European Stability Mechanism in place, the Germans are optimistic that any future Greek problem can be contained.

The second reason why Germany was hesitant about allowing a ‘Grexit’ to occur was fear that German financial institutions might be hit hard. Indeed, at the beginning of the euro crisis, quite a few German banks were involved in Greece. Over the past five years, these financial institutions have withdrawn from Athens almost completely. The two largest German banks, Deutsche Bank and Commerzbank, only retain exposures to Greece of EUR 300 and 400 million respectively. For banks of this size, such sums are peanuts.

What has changed, therefore, is not so much the political direction that Greece may take after its elections. The main reason why Germany is about to change its position on Greece is because it no longer fears a Greek exit.

This nicely demonstrates what all this eurozone activism over the past five years was really about. It had very little to do with ‘helping Greece’ and a lot with protecting one’s own interests. Had it been about helping the Greeks, it would not have taken so long to show them a viable path towards exiting a monetary union which clearly does not work for them.

German power politics kept Greece in the eurozone, and German power politics may now kick Greece out of the eurozone. It is as simple as that. This has never been about Greece and its problems but about Germany and its interests.

To avoid any misunderstandings, Merkel’s U-turn on Greece should be welcomed because, as I have always said, Greece’s chances of recovery would be much better if it had its own currency. But the return to the drachma should have been better prepared.

By threatening to kick Athens out of the eurozone depending on the election result, the Germans have put Greece in limbo. Little wonder Greek stocks crashed in recent days. A cloud of uncertainty now hangs over the country. It should not surprise anyone if, as the election gets closer and Syriza is still in the lead, a bank run starts. Why would anyone keep their Euros in Greek bank accounts when a monetary reform and devaluation appear to be around the corner?

If Greece was to leave the eurozone, such a step should have been taken swiftly and ideally without much public warning. What is happening now is the very opposite. Weeks before the Greek election, the German government as the pivotal player in the eurozone has signalled that Grexit may be unavoidable. This is certainly not the way in which to prepare for it.

Once again, we are treated to European-style crisis management. Or rather: crisis amplification. Instead of dealing with the Greek crisis, the actions of European leaders, in this case the German government, are making a bad situation worse.

Over the coming weeks, we will see more political and economic uncertainty in Greece. Not all of it the fault of the Greeks.

Should the 25 January elections result in a Syriza-led government, we will find out whether the Germans can actually succeed in kicking Greece out of the euro and also whether their optimism about being able to contain the crisis in Greece was justified.

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