Euro-Zone Exit Scenarios: Germany Plans for Possible Greek Default
Part 2: 'Like Constantly Telling Children to Clean Up Their Room'
Even if the Greek government were to take this ultimate step, the consequences would be manageable, government experts believe. This was not the prevailing view in early May, however, when the finance ministers of the large euro-zone countries assembled in Luxembourg for a secret meeting with their Greek counterpart and Euro Group President Juncker. One of the items on the agenda was the possibility of Greece withdrawing from the monetary union.
While experts were still warning against the consequences of such a step in May, today those consequences seem more acceptable to the euro-rescuers. They have even found a solution for a problem that had Schäuble's officials worried at the time. Contrary to earlier assumptions, restrictions on the movement of capital, which could be used to prevent Greek citizens from moving their money abroad (something that would endanger the country's banks), are now seen as being compatible with EU law. Article 143 of the Treaty on the Functioning of the European Union offers a loophole, in that it permits certain countries to "take protective measures."
The new line is not entirely uncontroversial, however. This became apparent at a meeting of the euro zone's deputy finance ministers last Monday, when the so-called troika of the European Commission, European Central Bank and IMF gave its report on the situation in Greece.
The group was divided in the end. For the first time, there was a majority, led by the Germans, Dutch and Finns, that advocated pulling the ripcord on Greece.
The southern countries, including France, were considerably more reserved. They feared that if funds were cut off for Greece, they could be next in line.
Schäuble hopes to allay their fears. He argues that Greece, unlike the other crisis-hit countries, is a hopeless case. Or, as Greek Minister for Regional Development and Competitiveness Michalis Chrysohoidis told the Berlin newspaper Tagesspiegel: "The Greek economy is dying."
He has a point. More and more companies are filing for bankruptcy, and Greece's austerity program is already hopelessly behind schedule, in terms of both the sale of government property and the agreed reforms. "It's like dealing with children that constantly have to be told to clean up their rooms," complained one member of the delegation. The troika members from Europe were particularly incensed, while the IMF representatives were more tolerant. Nevertheless, everyone is irritated over the lack of progress.
The privatization program had been envisaged more than a year ago but started very slowly. It is supposed to provide Greece with 50 billion in revenues by 2015, but it was only recently that officials even assembled a list of state-owned companies and properties. Kostas Mitropoulos, 56, who until a few weeks ago was head of global equity investment banking at the Greek bank Eurobank, is the boss of a new privatization agency.
Mitropoulos likens himself to a soldier who has dedicated himself to a "battle" for credibility, "a real war." His office is sparsely furnished with a desk, a small conference table and sports trophies arranged on a cabinet. Mitropoulos still has to recruit some of his team. He needs people with a special personality, he says, people with the necessary passion to achieve "something nearly impossible," as he adds ironically.
The most promising items on the list of government assets up for sale are the lucrative oil company Hellenic Petroleum, the usage rights to the Athens airport and the licenses for OPAP, the state-owned lottery and betting company.
But there are also companies on the list that will struggle to attract buyers at the moment, like the Greek national railroad, which has been losing billions for years, and the Hellenic Postbank. In addition, the powerful labor representatives in many state-owned businesses will deter potential investors. Union organizers at the electricity monopolist DEI are seen as especially radical. They have already threatened to cut off electricity if the company is privatized.
The unions are fighting for their perks. Greece's state-owned companies are a benefits paradise. In some cases, bonuses are even paid to employees for washing their hands. The roughly 20,000 employees of DEI earn twice as much as a high-school teacher on average.
When experts at German utility RWE considered a purchase of the Greek energy provider, they quickly thought better of it, concluding that the company could not be reformed.
Mitropoulos is supposed to have investment deals worth 1.7 billion sealed by the end of September. That's the plan, but in reality this is impossible, for technical reasons if nothing else. Does he worry that the troika will refuse to release the next tranche of aid? No, says Mitropoulos. "I live for the next day."
Another reform project, the timely collection of all taxes, is also making no headway. "We have the impression that the administrative bureaucracy is incapable of doing this," says Prime Minister Papandreou.
Greek citizens and companies owe the state a total of almost 40 billion in taxes. The sum would more than cover the government's budget deficit for 2011.
But many government agencies are seen as inefficient and corrupt. Now that their salaries have been cut by 20 percent or more in the course of several rounds of austerity measures, the Greek tax authorities often perform the bare minimum of their duties, and sometimes even less.
Some 17 tax offices did not perform a single audit in the first seven months of the year. In Corinth, a city near Athens, the local tax authority collected only 18,000 in value-added tax within six months, even though the region is home to one of Europe's largest casinos and a number of companies are headquartered there.
A plan to cut 150,000 public-sector jobs is making no progress, partly because civil servants constitute part of the base of the governing Socialist party. The man who agreed to the first austerity measures with the troika is calling for patience. Former Finance Minister Giorgos Papakonstantinou warns against dramatizing the departure of the troika officials. "The negotiations have never been easy," he says, noting that Greece reduced its deficit last year more significantly than any other country. A coffee mug on his desk bears the message: "Work hard, be nice to people."
Greece's plight is so massive that the country's would-be rescuers are losing patience. Europe would have to "brace (itself) for trouble" if Greece went bankrupt, warns former German Finance Minister Peer Steinbrück in a SPIEGEL interview. Nevertheless, he too is convinced that "if the demands on Greece aren't taken seriously," the next tranche will probably "not be paid out."
Other Countries Doing Better
A Greek bankruptcy is getting closer, partly because Europe's other problem countries have made noticeable progress in recent months. This reduces the risk of contagion, say officials in the German Finance Ministry.
The Irish, in particular, have recently sparked hopes that they are turning the corner. The country is regaining the confidence of financial markets, as evidenced by a significant decline in the risk premiums on Irish government bonds in recent weeks. The Irish benefit from their intact export economy. Many international corporations have set up their European headquarters in Ireland, including Apple, IBM and Google. Thanks to exports, the Irish economy is growing again, registering a 1.3 percent gain in the first quarter of 2011 compared to the previous quarter. Ireland is pinning its hopes on exporting its way out of the crisis.
Portugal would like to take the same approach, but the country lacks enough products that are competitive on the international market. This is forcing the center-right government of Prime Minister Pedro Passos Coelho to employ tougher methods.
It is cutting back healthcare services and salaries for government employees. Hardly any government expenditure has remained untouched. At the same time, Coelho is raising taxes on high-income groups, electricity and natural gas, and even Christmas bonuses. The Portuguese are being asked to make substantial sacrifices. There has been some grumbling so far, but they have largely tolerated the government's decisions. Coelho has prepared them for "two difficult years."
Not surprisingly, the troika has responded positively to these efforts, noting that the country is on schedule. Portugal even moved up a notch to 45th place on the World Economic Forum's Global Competitiveness Index rankings for 2011-2012, which were released last week.
Neighboring Spain completed a somewhat larger jump forward on the list, from 42nd place in 2010-2011 to 36th place in the current ranking. The Spaniards have already put up two of their airports for sale and enshrined a balanced-budget provision, also known as a "debt brake," in their constitution. The new law limits new government borrowing to 0.4 percent of GDP, but not until 2020.
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Some 440 billion come from a special purpose vehicle -- the European Financial Stability Facility (EFSF) -- that finances itself by issuing bonds on the market. Liability for the EFSF is jointly shared among EU countries. In November 2010, Ireland applies for a bailout from the rescue fund. In April 2011, Portugal follows suit.
Germany's share: 123 billion.