'The Troika's Policies Have Failed': European Doubts Growing over Greece Debt Strategy

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The main players for whom the current crisis offers an opportunity are the smaller, leftist parties, whose ranks are swelling rapidly. Their slogans are all more or less in the same vein: "End the international occupation."

The strange thing about the euro crisis is that many of the supposed international occupiers feel precisely the same way. After two years of endless discussions on Greece, there is a growing recognition among politicians in Germany, the main contributor to the bailout, that things can't continue this way.

The German chancellor and her finance minister got a clear picture of the mounting dissatisfaction within their party, the conservative Christian Democratic Union, last Friday morning. Merkel and Schäuble had summoned CDU members of parliament to a special meeting to discuss the path to the upcoming parliamentary vote on the second Greece bailout package, scheduled for February 27. The mood at the meeting was chilly. Germany's parliamentarians are tired of the subject of Greece. Before each new bailout plan, they're told that this time, Athens really is serious about reforms. Then, once that plan is approved, they're told reforms aren't making progress.

Gunther Krichbaum, a CDU politician who heads the parliament's Committee on Affairs of the European Union and who is generally loyal to the government's positions, had a number of questions for Schäuble right upfront. Krichbaum wanted to know whether the second Greece package would really stop at €130 billion, and what would guarantee proper tax enforcement in Greece.

Schäuble retreated into flippancy. "That's difficult even in Germany," the finance minister replied, drawing laughter. It was the last humorous moment at the meeting.

'That's the Limit'

Even if parliament does give the nod to the second Greece package on February 27, the frustration within the CDU has long since reached even the highest echelons of the party. "If those responsible for implementing reforms were able to hold out hope that they would nonetheless receive additional payments, we would never reach a stable euro zone," warns Horst Seehofer, head of the Christian Social Union, the CDU's Bavarian sister party. Seehofer supports Merkel's bailout policies, but isn't looking to spend endless billions on them. "Germany's total contribution can't be raised past the €211 billion mark," he says. "That's the limit."

Wolfgang Bosbach, one of the bailout opponents within the CDU's ranks, doesn't see much of a future for Greece in the euro zone. "I can't approve the second bailout package because the country lacks the economic strength, competitiveness and efficient public administration necessary to be able to finance itself again at least in the medium term," he says. Thomas Silberhorn, a member of the Bundestag for the CSU who works on issues relating to the EU, agrees. "We're giving up one fundamental position after the other," he says.

Leaders of the business-friendly Free Democratic Party (FDP), Merkel's junior coalition partner, backs the chancellor's approach, but the FDP doesn't want to be held accountable if the Greek bailout fails. "Greece needs to deliver now," party leader Philipp Rösler declared last week, trying to get his party to commit to the plan. Still, party leadership fears its parliamentarians' frustration. Several parliamentarians have stated internally that they're not sure they could approve an increased aid package.

Even the center-left Social Democratic Party (SPD) is having an increasingly difficult time with the Greek bailout. On the one hand, the party's members in parliament have so far gone along with Merkel's policies. But on the other, they disagree with the focus on austerity. It was this tension that prevailed at a special session of the party's parliamentary group on Friday.

Germany's Share

Parliamentary group leader Frank-Walter Steinmeier, who wants his party to endorse the package, hoped simply to assess the group's position on the topic, but a number of parliamentarians were more interested in starting a discussion. Many took a turn speaking, with the general drift being that pure austerity policies such as those being carried out in Greece amount to economic nonsense. Steinmeier interrupted the speakers to ask: "So, does that mean we should vote against the Greece package?"

Germany's party leaders are at a loss. They see opinion turning against a new Greek bailout, but they're aware at the same time that the alternative carries considerable risks: If Greece goes bankrupt, the German government stands to lose dozens of billions of euros in the worst case scenario.

Euro-zone member states, together with the IMF, have already sent over €70 billion to Athens in the form of bilateral loans. Germany has sent the largest share, at €15 billion.

German taxpayers also share liability for Greek government bonds taken on by the European Central Bank (ECB) during the financial crisis, bonds which would become largely worthless in the case of bankruptcy. The Munich-based Ifo Institute for Economic Research estimates this would cost German taxpayers alone up to €13 billion.

Athens' central bank has around €108 billion at the ECB in so-called Target 2 balances, as a way of assisting Greece's banks. These debts as well would likely lapse for the most part if Greece left the monetary union, and would need to be made up by the remaining euro-zone countries' central banks. For Germany, the Ifo Institute estimates this could amount to further costs of up to €30 billion.

But even that isn't that last piece of the cost calculation. If Greece went bankrupt, the entire country would descend into chaos. Civil servants would no longer receive their salaries and retirees would have no pension. Greek banks, even now barely making ends meet, would be in danger of immediate bankruptcy, as would many companies.

The collapse of Greece's economy would affect the European banking sector as well. German or French banks would have to permanently write off not only Greek government bonds, but also many loans made to the country's private sector. For German banks alone, around €14 billion are at stake. For their French competitors, that figure is higher, at €35 billion. Some banks would not be able to absorb these losses themselves, and would require additional aid from the government.

'Mildest Possible Horror Scenario'

The costs of Greek bankruptcy, in other words, would be immense. Still, the calls to finally put an end to the Greek tragedy are growing ever louder. Head of the Ifo Institute Hans-Werner Sinn, for instance, believes the country's bankruptcy would be the "mildest possible horror scenario" for all concerned.

But what happens if Greece then leaves the euro zone? In the interest of economic recovery, drawing a clear and final line under the entire euro adventure would be the logical next step. If the Greek government were to reintroduce the drachma, greatly devalued, it would make the country's goods and services cheaper. The tourism industry, for example, would then have a considerable advantage over competitors such as Spain. "This is the most well-proven and feasible way to overcome crises such as the one in Greece," American economist Kenneth Rogoff explained in a lecture at Berlin's American Academy last week.

But though that move would help Greece, it would have unpredictable consequences for the rest of the euro zone. "No one can predict how contagious such a step would be," says Oxford economist Clemens Fuest. EU politicians would be quick to assert that Greece is a special case, but whether EU citizens and international investors would believe those assurances is doubtful. They've seen promises broken too often in the course of the euro crisis.

If concerns escalated that Greece would become just the first of many countries to leave the monetary union, it could trigger a dangerous chain reaction. Banks, insurance companies and funds would try to divest their government bonds from crisis-ridden countries as quickly as possible. Meanwhile, residents from Lisbon to Madrid to Rome might start raiding their bank accounts and moving the cash to northern Europe. The gradual capital flight seen in recent months would become a true bank run, which could in turn bring the monetary union to the point of explosion.

European leaders find themselves in a nearly irresolvable dilemma. If they go on as they have been, the country won't emerge from the crisis. If they force Athens out of the euro zone, they endanger the entire monetary union. That leaves just one viable -- but expensive -- strategy: Allow Greece to go bankrupt, but within the euro zone. This would make it possible to reduce the country's mountain of debt to a manageable level, providing the necessary leeway for a new start both economically and politically, through tough structural reforms and a growth strategy for industry and services.

This approach would provide the plan B politicians in both Brussels and Berlin have long been searching for. It's not yet clear when they will gather the courage to take this inevitable step, but those involved are already contemplating how best to justify, both internally and externally, the departure from the current course of action. "If Greece fails," Finance Minister Schäuble said during the CDU parliamentary group's meeting on Friday, "it can't be because of Germany."

BY SVEN BÖLL, MARTIN HESSE, JULIA AMALIA HEYER, CHRISTOPH HICKMANN, PETER MÜLLER, RALF NEUKIRCH, CHRISTIAN REIERMANN, MICHAEL SAUGA and ANNE SEITH

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• Part 1: European Doubts Growing over Greece Debt Strategy
• Part 2: 'The Troika's Policies Have Failed'
• Part 3: Growing Frustration in Berlin