Greece Reality Check: Euro Crisis Worsens as EU Leaders Play for Time

By SPIEGEL Staff

Europe's leaders are still opposing a Greek debt restructuring, and they are exacerbating the euro crisis as a result. The Greek economy is at risk of collapse and resistance to further loans for the troubled nation is mounting. The continent urgently needs a new bailout plan.

Greek Prime Minister Georgios Papandreou (L) with French President Nicolas Sarkozy (C) and German Chancellor Angela Merkel (R) at an EU summit in February. Zoom
REUTERS

Greek Prime Minister Georgios Papandreou (L) with French President Nicolas Sarkozy (C) and German Chancellor Angela Merkel (R) at an EU summit in February.

The formal act was quickly settled, but German Finance Minister had no time to celebrate. The members of the budget committee in the German parliament, the Bundestag, had hardly given their blessing to billions in new aid for ailing Portugal last Wednesday before parliamentarians were drilling the finance minister with questions about the next troublespot -- Greece.

The lawmakers wanted to know more about the secret meeting held the previous Friday, which had been reported by SPIEGEL ONLINE and which top European politicians were still denying as their limousines were pulling up to the Château de Senningen in Luxembourg. Was it true that Greece needs billions more in financial assistance?

More importantly, the parliamentarians wanted Schäuble to elaborate on reports that Greece is insolvent and that the government in Athens has already considered withdrawing from the monetary union.

In his lengthy response to their questions, the minister denied the reports, explained the turf battles during the negotiations in Brussels and asked the parliamentarians to remain patient until an international panel of experts had thoroughly assessed the situation in the country. "For now, we're going to wait until the results of the report are out in July. Then we'll see what happens next."

As they play down the issue, try to appease critics and play for time, Germany's finance minister and his European counterparts are determined to keep on denying reality in the struggle to rescue the common currency.

More than a year ago, they created a €110 billion ($157 billion) bailout fund for Greece. Since then, however, the likelihood of a government bankruptcy has only increased. The country's mountain of debts is growing, the economy is at risk of collapsing and the promised austerity programs are not progressing as planned.

Restructuring 'Out of the Question' -- For Now

As a result, economists and financial experts have long agreed that forgiving a large share of Greece's debts will be unavoidable. European leaders, however, seem to be resorting to denial and faith healing instead.

"A restructuring of Greek debts is absolutely out of the question," says French Finance Minister Christine Lagarde, while Schäuble notes: "A debt restructuring is not under consideration and is completely speculative."

Instead, the European Commission intends to fight the crisis with new debts, even though government officials in European capitals are still denying this, as usual. There is talk of a €60-billion loan package, additional austerity programs and even tougher austerity.

If the medicine isn't working, increase the dose. That, at least, is the treatment plan being pursued by the saviors of the euro in Brussels. A new austerity and loan program would not only increase Greece's debt and curb the economy even further. It would also stigmatize Greece as Europe's stepchild for decades to come, dependent on the goodwill of the lender nations, governed by the inspectors of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), a prospect London's Financial Times describes as a "political nightmare."

It would also worsen public antipathy towards the EU. Anti-EU parties are on the rise throughout the bloc, and beleaguered governments from Copenhagen to Rome have no better solution than to fight back with narrow-minded nationalism.

The Libyan crisis is a case in point. Germany initially opposed its allies, France and Great Britain, and then Rome and Paris squabbled over what to do with refugees from North Africa. Last week, the Danish government introduced border controls that may be in violation of European treaties.

Merkel May Face Party Rebellion Over New Loans

A new bailout program for Greece would poison the political climate, including the one within Berlin's coalition government. For weeks, lawmakers from Chancellor Angela Merkel's coalition of conservatives and pro-business Free Democrats (FDP) have voiced their concerns over Europe's strategy in the euro crisis. Now the prospect of even more billions for Greece is fueling their resistance.

If the coalition is forced to vote on new euro aid after the summer recess, Merkel's parliamentary majority will be in jeopardy. Government officials say Merkel may even have to call a vote of confidence to get the funding approved.

Still, it is becoming clear to most European governments that the bailout programs for Greece cannot continue in their current form. For weeks, European finance ministers have been debating possible alternatives.

At the secret meeting on Friday, May 6, the finance ministers from the large euro countries, ECB President Jean-Claude Trichet and Eurogroup President Jean-Claude Juncker convened at the Luxembourg government conference center to discuss the increasingly ominous situation in Greece.

Greek Finance Minister Giorgos Papakonstantinou was also invited. His counterparts had intended to put him back on track, because the Greeks had recently failed to fulfill the internationally imposed austerity requirements.

'Lack of Linguistic Discipline'

The meeting was intended as a forum for issues that the players would normally hardly dare to mention in so much as a whisper. Schäuble had come well prepared. His 150-page folder of talking points included an analysis of the Greek debt situation and a study on additional privatization options, as well as documents on a restructuring of the Greek national debt. The most explosive document was described in the table of contents as follows: "German Background Document: Greece's Withdrawal from the Monetary Union."

When SPIEGEL ONLINE reported on the meeting and quoted from the document, it was Schäuble who suddenly found himself in the dock rather than his Greek counterpart. The other finance ministers accused him of lacking control over his staff. "We are surprised by the lack of linguistic discipline in Germany," one participant complained afterwards. "This isn't the first time that information from Germany has caused problems."

The scenario is by no means an invention by finance ministry officials in Berlin, who, in writing the document, were merely reacting to considerations in Athens, as SPIEGEL learned last week. According to sources within the European Commission in Brussels, the government of Prime Minister Georgios Papandreou had already reviewed the pros and cons of withdrawing from the euro zone some time ago.

The plan is now off the table, and the issue of a debt restructuring was also no longer relevant at the meeting, at least not for the time being. There was too great a fear of upsetting the markets even further, after the news of the secret meeting had been leaked.

Athens Seeking Better Loan Terms

Instead, Athens asked for better terms. It argued that the debt burden could be made more tolerable if the interest rates were reduced once again and the periods of the bailout loans were extended.

The representatives from the donor nations responded coolly to the idea. New concessions, they said, would only be an option if the Greek government tightened its reform efforts even further, despite strikes and mass demonstrations. First Greece would have to sell off additional government assets and thereby raise up to €50 billion. Because the program is not making any headway, Schäuble is already thinking of sending privatization experts from his ministry to Athens as advisors.

The participants spent hour after hour arguing, so that by the end of the meeting they were only able to agree to stick to the current bailout program: No reduction in the Greek debt, but possibly new loans in return for additional austerity requirements. Meanwhile, the currency crisis continues to smolder.

But hardly anyone believes anymore that Greece can avoid a restructuring, or a debt haircut. Its mountain of debts has grown to more than 150 percent of gross domestic product this year. Meanwhile, the economy is shrinking, partly because of the austerity measures.

The country is stuck in a vicious circle. Investors refuse to lend Greece money at affordable interest rates because they are convinced that Greece is over-indebted. This forces the government to accept bailout loans from its partner countries, which further increases debt levels while reducing creditworthiness.

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1. Teutonic Insincerity
PHOEVOS 05/16/2011
I find it quite insincere to talk about an inevitable debt Greek haircut. We all know that there are other options, such the issuance of Eurobonds to replace and re-position all eurozone debt. What is the purpose of this relentless onslaught on Greek restructuring? How can you possibly so narrowly frame the issue just because the average German taxpayer has an aversion to certain financial solutions?
2.
BTraven 05/20/2011
---Quote (Originally by PHOEVOS)--- I find it quite insincere to talk about an inevitable debt Greek haircut. We all know that there are other options, such the issuance of Eurobonds to replace and re-position all eurozone debt. What is the purpose of this relentless onslaught on Greek restructuring? How can you possibly so narrowly frame the issue just because the average German taxpayer has an aversion to certain financial solutions? ---End Quote--- I don’t know why Germans are so eager to focus on Greek. It seems to me that it must have something to do with one part of their mentality of which, before the financial crises erupted three years ago, had been thought that it would not exist anymore, however, it has turned out that it still plays an important feature of their psyche, namely that they think, partly because of their success, that everybody should follow the way German has successfully taken what in this case mean that the Greeks must be as thrifty as the Germans. There is no understanding for someone who can’t not pay back his debts. He had to suffer no matter whether it makes sense or not.
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