• Print
• E-Mail
• Feedback

02/22/2010

The German financial regulators also assign a significant portion of the blame for the current situation to speculators. "Among hedge funds, in particular, there are those that are betting on a Greek insolvency and a collapse of the euro zone."

If a number of countries do in fact default, the BaFin experts believe that the euro zone will have arrived at the limit of its effectiveness. The EU countries, together with international central banks, could perhaps fend off attacks on Greece, but, as the BaFin document warns, "in the event of speculation and financing problems in all of the PIIGS countries, serious problems could arise, along with substantial market disruptions."

Partly as a result of the pressure caused by the Sanio letter, Schäuble and Asmussen decided to clear the way for assistance to Greece. There are essentially three options, although two have already been discarded. The first option -- a joint bond issued by all the euro zone members -- was considered unrealistic right from the start. Assistance from the International Monetary Fund (IMF), which has helped countries out of financial crises in all regions of the world, is no longer an option. Schäuble, for one, would consider it an embarrassment if Europeans were unable to help themselves.

This leaves the third option, bilateral assistance, which Schäuble has discussed with his French counterpart, Christine Lagarde. The French are particularly insistent that action be taken quickly, a point President Nicolas Sarkozy has repeatedly made with Chancellor Angela Merkel.

Rescue Package

Early last week, the German-French duo brought the remaining finance ministers in the euro group on board. Officially, all are still cloaked in silence and behaving as if bailouts will not be necessary. Nevertheless, the package of measures is beginning to take shape.

The German Finance Ministry expects support for Greece to amount to between €20 billion and €25 billion. All the members of the euro group are expected to participate, including those, like Spain and Portugal, who also might find themselves needing help soon. The individual countries' contributions will be determined on the basis of their respective shares of the capital of the European Central Bank (ECB). Under this scheme, Germany would be responsible for about 20 percent, or €4 billion - €5 billion.

The assistance is to consist partly of loans and partly of loan guarantees. KfW, the German state-owned development bank, will process the German share. Schäuble's experts want to tie the measures to strict requirements. For example, one credit tranche would only be transferred once the Greek government demonstrated that it had begun reforms of its pension system. The procedure is copied from the IMF. But is it legally valid?

For years, the validity of Article 125 of the "Treaty on the Functioning of the European Union," one of the EU's core treaties, was considered irrefutable in Germany's political debates. The regulation bars the euro countries from helping each other get out of debt.

This passage is also partly responsible for having convinced a skeptical German population to accept the introduction of the euro. Article 125 "tolerates no compromises," says Otmar Issing, the former chief economist at the European Central Bank.

New Provisions

Hence the legal experts in the German Finance Ministry had to go to great lengths in order to justify the planned bilateral assistance. After an initial review, they concluded that the measures were inadmissible. Schäuble was irate and ordered his staff to continue their review until all objections had been swept aside.

Now, the official version is that the participating countries will not assume any of Greece's debt, which would be forbidden under the treaty. Instead, they will add new debt to the existing debt, something that the rules do not prohibit.

Schäuble's officials know all too well that the interventions will nevertheless strain the framework of the agreement and the equilibrium of the currency union. For that reason, they intend to introduce new future-oriented provisions once the current measures have been taken.

They believe that the Stability and Growth Pact, the sole purpose of which is to coordinate the debt policies of member states, is no longer adequate, and that the euro countries will have to coordinate their economic policies with each other more effectively in the future. They also say that it will be necessary to develop a regulated procedure for national insolvencies within the framework of the euro group.

European Inflation Union

The Finance Ministry officials are also thinking about creating a new institution, modeled after the IMF, to handle future bailout efforts. This European fund would provide financing to countries in difficulty.

It is still unclear how the new rescue fund will be financed. There are two conceivable options: Each member state's contribution could be based on either its share of ECB capital or the level of its deficit.

The second solution would be fairer: the worse a country's financial policy, the higher its contribution. In other words, the biggest sinners would be required to pay the highest indulgence.

Such an institution doesn't exist yet, which means that European politicians will have to make do with what they have. The financial strength of the donor countries could soon be depleted. This could force ECB President Jean-Claude Trichet to buy up the debt of the countries facing bankruptcy -- which is tantamount to printing money. Although this is prohibited under the Maastricht statutes, the EU finance ministers already demonstrated that the treaty could be amended if necessary when, in 2005, they stealthily relaxed the 3 percent criterion for government debt.

Such a bailout would come at a high price: It would turn the European monetary union into an inflation union.

ARMIN MAHLER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, WOLFGANG REUTER, THOMAS SCHULZ

• Back
• 1
• | 2
• | 3
• | 4

• Part 1: Can the Euro Zone Cope with a National Bankruptcy?
• Part 2: The Speculators' Sharpest Weapon
• Part 3: Fallen from Favor
• Part 4: Betting on a Greek Insolvency