Why Germany is losing the blame game

Published in Business Spectator (Melbourne), 16 July 2015

reichstagAs readers of this column will be aware, I am not Angela Merkel’s greatest fan. Nor do I think that her strategy on Greece has been particularly successful. She has certainly made some terrible mistakes over the past years, which have cost both the Greeks and German taxpayers dearly.

Having said all that, the vitriol directed at the German Chancellor and her Finance Minister Wolfgang Schäuble after last weekend’s marathon summit strikes me as deeply unfair. While the negotiations were still happening, the hashtag #thisisacoup was making the rounds on Twitter. Paul Krugman accused the Germans on his blog of betraying the spirit of European integration. The latest attack on Germany calls for a boycott of German products.

So what is Germany’s crime? Apparently, its harsh stance on Greece and its insistence on reforms, budget cuts and austerity were somehow ‘un-European’. Which probably means it should have just been nicer to the poor Greeks despite its government’s erratic and sometimes appalling behaviour.

My first thought on this is on a purely personal level. Over the past years, Merkel and Schäuble have been routinely caricatured by the Greek media and Greek politicians as Nazis, bloodsuckers and terrorists. They have been defamed, insulted and offended. Did anyone launch a Twitter hashtag campaign when that happened? Has there ever been a call to order that such behaviour is indeed not just un-European, but just uncivilised? The people who now complain loudly about Germany’s tough but entirely polite negotiating position should ask themselves whether they are not applying different standards.

Beyond the personal level, the accusations against Germany are also misdirected on other fronts. To begin with, it is not as if Greece got an overly tough deal from the ‘institutions’ over the past three years. Its debt has already been restructured in a first haircut and repayments have been stretched over almost four decades. As a result, Greece’s annual interest load as a percentage of its GDP is smaller than Italy’s, Spain’s or Portugal’s — and only slightly higher than Germany’s.

This is to say that the troika showed patience and leniency with Greece. No other country ever received an IMF bailout package as big as Greece’s. Despite enormous popular resistance in their countries, the leaders of Europe’s creditor nations underwrote enormous guarantees for Greece. They also provided technical expertise to consecutive Greek governments and offered their help in building a modern, functioning state apparatus — something Greece has not had for centuries.

Sadly, for the past five years, Greek governments did not implement the reforms that would have been required to get the country back on track. The country still does not have a proper land registry; its labour market is still sclerotic; and paying tax seems like a voluntary exercise. Is it any wonder, then, that patience with Greece is running out in the creditor countries (not just Germany)?

Also, is it fair to other European nations to give Greece more time, attention and money than any other country? How do you explain Greece’s preferential treatment to Estonians, Spaniards, the Irish or the Portuguese, all of whom had to undergo tough reforms to become part of the eurozone or stay inside it?

But back to the allegedly mean-spirited Germans. Having done what was required of them for five years, the German government apparently concluded that it was pointless to try more of the same. Instead, a growing faction within the government preferred to solve the Greek crisis by taking Greece out of the eurozone, at least temporarily. Even after such a Grexit, Germany would have been prepared to assist Greece and help it restructure. There is no shortage of solemn pledges by German politicians not to let Greece fail — and they are credible.

However, keeping Greece in the eurozone at all costs is not the same as helping Greece. And conversely, taking Greece out of the eurozone is not the same as destroying Greece. Germany’s critics often overlook this simple fact.

Before last weekend’s euro summit, Germany thus wanted to depart from five fruitless and expensive years of failed bailout strategies. But it was not allowed to do that because Germany found itself under enormous pressure on multiple fronts.

The US government, concerned about the geopolitical implications of a potential Grexit, pushed hard for a third bailout package. It is not clear whether the Americans’ reasoning is entirely plausible. At least it is hard to argue that bailing out Greece helped to stabilise it politically. If anything, the experience of the past five years points to the very opposite. In any case, it is easy for the Obama administration to call for a bailout since it does not contribute anything to it.

More pressure came from the European Commission, which of course pushes for more bailouts since it has no interest in seeing European integration go into reverse. The International Monetary Fund also called for another package because this is the only scenario under which the IMF would have a chance of seeing back some of its loans. Not a small issue for the IMF’s head Christine Lagarde, if she wants to go for a second term.

The European Central Bank had a similar motivation in supporting the bailout. Otherwise the ECB would have to write off its loans to Greece, which could see it in negative equity. That would not be technically impossible for a central bank, of course, but hugely embarrassing regardless.

Finally, there are the French, who saw this crisis as a way of regaining their lost strategic influence. For President François Hollande, siding with Greece and calling for a bailout was the best way of asserting his position against the German Chancellor.

All of this pressure had the desired effect. Germany was beaten into submission. Merkel and Schäuble had no other choice but to agree to a third bailout package which they had always categorically ruled out and which is deeply unpopular in their country. Merkel even risks her chancellorship because there is a growing rebellion in her party against further packages for Greece.

The only thing Merkel and Schäuble could do was to increase the price of German support. At least they could argue that Germany would not lightly commit to more assistance to Greece. This explains their position.

You may not like the deal reached at the summit, and I still believe it would have been better to take Greece out of the eurozone, but under the circumstances this was the only deal possible. In any case, it does not justify any of the hostility the Germans and their government have been subjected to in the international media.

How about blaming the US Government, the IMF, the EU Commission, the ECB or maybe even the Tsipras Government for a change?

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