A Bluffing Game European Politicians in Denial as Greece Unravels
Europe's politicians are losing touch with reality. Greece is broke, and yet Brussels wants to send the country billions in new loans, to which there is growing opposition within the coalition government in Berlin. Rescue efforts are hopelessly bogged down by bickering over who will ultimately step up.
Martial music booms from the loudspeakers as warlike images gallop across monitors. A short euro crisis film montage shows police officers being posted in front of the parliament building in Athens and the jostling of frantic reporters, then US investor George Soros uses grim words in an appeal to rescue the euro zone. "The alternative is just too terrible to contemplate," he says.
Speaking in a panel that follows the short film, German Finance Minister Wolfgang Schäuble, a member of Chancellor Angela Merkel's center-right Christian Democratic Union (CDU), has a gloomy expression. It is last Friday when the global business elite were at the World Economic Forum in Davos, Switzerland, to discuss the "Future of the Euro Zone." It becomes quickly apparent that Schäuble would have preferred a different opening than the dark film for this event. The negotiations with Athens' private creditors are going well, he says, and he points out that he is "quite optimistic" Greece can be rescued.
But later European Union Economic and Monetary Affairs Commissioner Olli Rehn, standing next to the stage, imparts a very different message to reporters. He concedes that Athens needs money once again, but that he cannot yet reveal just how much. Nevertheless, he adds, it is "likely" that the donor countries will have to come up with "a slightly larger contribution."
Once again, Europe is arguing over a bailout for Greece, and it looks as though the result will be no different that it has been in the past. German Chancellor Angela Merkel opposed lending money to Athens in early 2010, and then the first bailout package for Greece was put together. A year later, she balked at further aid, and then came the second program. Now she is trying to protect the euro zone's coffers once again, though no one in Berlin or Brussels is willing to bet that she will have more success this time around.
Europe's politicians continue to battle reality. Everyone knows that Greece cannot repay its massive pile of debts, now at more than 350 billion ($459 billion). But instead of effectively reducing the financial burden, European politicians intend to approve new loans for the government in Athens and go on fighting debt with new debt. "If the country wants to remain in the euro zone, we should support it," says Austrian Chancellor Werner Faymann.
Though the rescuers may be issuing calls for perseverance, resistance is growing in Europe. In Athens, political parties and citizens are fighting too keep austerity measures from transforming their economic downturn into a full-on crash. And in Germany, the main donor country, leading politicians within the two coalition parties, the CDU and the business-friendly Free Democratic Party (FDP), do not believe that a majority of parliamentarians will vote for additional aid to Greece. "Our position has not changed," says Horst Seehofer, the chairman of the CDU's Bavarian sister party, the Christian Social Union (CSU). "There is no money for a standstill in reforms."
The effort to rescue Greece is clearly moving in circles, and there is no evidence of any progress.
Ironically, only three months ago European leaders believed that things were already on the mend. Greece's private creditors were supposed to abandon half of their claims, and the partner countries planned to contribute another 130 billion ($172 billion). These efforts were expected to bring the country's debt level from more than 160 percent of gross domestic product (GDP) to a more tolerable 120 percent by 2020.
But these hopes were deceptive. The Greek economy is shrinking faster than European politicians believed was possible in autumn, and now the country is short on funds once again. The representatives of the so-called troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), estimate the shortfall to be about 15 billion, meaning that Greece needs 145 billion instead of 130 billion. "We do not assume that the additional funds can be collected solely from private creditors," say sources within the troika.
The only other option is to redistribute the burden. Under the current program, the IMF is responsible for about one-third, and the Europeans for two-thirds of the costs. But obtaining cash is becoming increasingly difficult. A serious dispute over who will come up with the additional money has been raging behind the scenes for days -- a dispute that resembles a game of Old Maid.
Politicians Bicker with Banks
The German government feels that the financial sector should bear much of the additional burden. If additional funds were needed, the banks would simply have to contribute more, the Germans argue. The countries involved are already pitching in 130 billion to the new bailout package, and Berlin feels that that ought to be enough.
The banks' representatives disagree completely. They have already increased their contribution several times, and now they point out that it isn't just private institutions that hold Greek government bonds. The European Central Bank, for example, holds up to 55 billion in Greek securities. Why shouldn't the ECB participate in the write-downs, Deutsche Bank CEO Josef Ackermann asks himself?
But Europe's monetary watchdogs indignantly reject such proposals. They only bought the bonds to maintain the money supply, say officials at ECB headquarters in Frankfurt's Eurotower. Waiving some of their claims, they argue, would be tantamount to intervening in the fiscal policy of countries. "If we did that, we would be taking on a portion of a country's debt," says a central banker. "And we are barred from doing that."
With such arguments, the monetary watchdogs passed the unwanted baton back to politicians. Last Thursday, EU Economic and Monetary Affairs Commissioner Rehn conceded that the hole in the second bailout package could only be plugged with government funds. The German government was not amused. "Rehn is completely alone in his opinion," a senior government official in Berlin grumbled. Nevertheless, European leaders know that the countries in the euro zone will not be able to avoid coming up with the funds for new loans to Greece. If there are no other options, says Luxembourg Finance Minister Luc Frieden, "the public sector may have to provide more money."
Europe is pursuing a Greece strategy of pressing on regardless of the potential cost. Meanwhile, it is becoming increasingly obvious that this method is not helping the country's economy get back on its feet. Although the Athens government is spending 20 billion less this year than it did in 2009, the debt ratio is still climbing, because the Greek economy will shrink for the fifth year in a row in 2012. And almost all experts agree that the country will not be able to pull itself out of the crisis on its own.
- Part 1: European Politicians in Denial as Greece Unravels
- Part 2: The Dismal Greek Economy