Photo Gallery: Time for an Exit?

Foto: © Francois Lenoir / Reuters/ REUTERS

Euro-Zone Exit Scenarios Germany Plans for Possible Greek Default

The rest of the euro zone is losing patience with Greece. German Finance Minister Wolfgang Schäuble is no longer convinced that Athens can be saved from bankruptcy. His experts at the Finance Ministry have been working on scenarios exploring what would happen if Greece left the euro zone. By SPIEGEL Staff.

Herman Van Rompuy is an influential man in Europe. He is already president of the European Council, the assembly of the European Union's heads of state and government. Soon he will also serve as the chief representative of the euro zone, if all goes according to plan.

Van Rompuy's new role as "Mr. Euro" is a highly prestigious position. German Chancellor Angela Merkel thinks highly of the unassuming Belgian politician, who conceals a propensity for toughness and efficiency behind his seemingly humble appearance.

One of Merkel's European counterparts felt the brunt of Van Rompuy's unconventional charm last Monday, when he took Greek Prime Minister Georgios Papandreou to task in a telephone conversation. The representatives of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), known as the troika, had left the crisis-ridden country in protest a few days earlier, because the Greek government had, once again, circumvented agreements it had made.

We have a problem, Van Rompuy said at the beginning of the conversation. Unless Greece delivers, he told Papandreou, the next tranche of aid would not be paid. Papandreou understood immediately: Van Rompuy was telling him the Europeans were on the verge of cutting off funding to his country.

A lot of people in Europe are displeased with Greece at the moment. "We cannot be satisfied with the latest reports from Greece," an irritated Chancellor Merkel said last week. "The troika mission must be continued and brought to a positive conclusion," said German Minister Wolfgang Schäuble. Even Euro Group President Jean-Claude Juncker, normally not one to engage in fearmongering, took Greece's prime minister to task on the phone. "Things are not moving at the right pace in Greece," he said after the conversation. "There are no results."

Losing Patience

The tougher talk is much more than show. The rest of Europe is losing patience with Athens. And after 18 months of crisis in the country, there is still no improvement in sight. Key economic figures are worsening, and there are growing doubts over whether the Greek government truly understands how serious the situation is.

In European capitals and at the European Commission, some are beginning to wonder whether the efforts of the last year-and-a-half were in vain. The partner countries have already provided Greece with €110 billion ($152 billion), and a second bailout has already been agreed upon. But Europeans are now beginning to realize that they have spent a lot of money for nothing.

The disappointment runs particularly deep in Berlin, where the government's crisis-management policy has clearly been going around in circles. In the beginning, the chancellor said that the Greeks ought to help themselves out of their own crisis. Then came the first and subsequently the second aid package. The new approach, the government said, was to rescue Greece so that the other debtor nations would be spared.

Now the Germans have come full circle, and the prevailing emotion is fear of a never-ending debacle in Athens. "Enough is enough," says one senior government official, adding that Berlin has lost patience with the Greeks. With a mixture of resignation and fatalism, Merkel and Schäuble are facing up to the inevitable and thinking the previously unthinkable: Greece is going bankrupt, and not even its withdrawal from the monetary union can be ruled out anymore.

Between Desperate and Hopeless

The planning for the day of reckoning is already underway, in departments at the Finance Ministry in Berlin as well as in task forces at the EU in Brussels. German Finance Ministry officials hope that a Greek bankruptcy would be manageable, as long as European politicians keep their cool and the bailout funds are increased as planned.

The motivation here is to send a signal, not only to Berlin's European partners, but also to skeptical politicians in Germany's coalition government. The message is that Europe also has an alternative to helping: If necessary, it can also withdraw its help.

The subject was discussed at a dinner last Tuesday at the German Finance Ministry, to which Finance Minister Schäuble had invited his counterparts Finnish Finance Minister Jutta Urpilainen and Dutch Finance Minister Jan Kees de Jager.

Officially, the ministers were there to discuss the collateral the Finns want to receive from the Greeks in return for further aid. But the real issue was the escalating crisis in Athens. The attendees were all aware that the situation in Greece is now fluctuating between desperate and hopeless, and that bankruptcy is probably unavoidable. The only differences of opinion were over the consequences.

Schäuble argued that the Greeks should remain in the monetary union, even after a so-called haircut. De Jager, however, was not opposed to their leaving the euro zone. The attendees did agree that the ultimate consequences are up to the Greeks themselves: The other members of the euro zone do not have the option of ejecting them from the monetary union.

Calculating the Consequences

Schäuble is convinced that things cannot continue as they are. He shared his concerns and conclusions in several conversations with close associates last week. Each time, his message was that he no longer believes that the Greeks will be able to fulfill the stipulated conditions, and that they are likely to run out of money as early as October.

Finance Ministry officials have already calculated the consequences. Last week, an envoy from Berlin presented the results to Germany's partners in Brussels.

There are basically two possibilities for a Greek bankruptcy, the German official said: Either the country remains in the monetary union, or it withdraws.

Either option would involve a haircut, meaning that Greece would only service a certain share of its debt, such as 50 percent. This would translate into significant losses for Athens' creditors, like the European Central Bank (ECB), other European Union countries and banks, insurance companies and financial institutions throughout Europe. Schäuble's envoy presented his Brussels audience with the results of the German Finance Ministry's simulations, and said that the goal should be to contain the damage caused by these losses.

The European Financial Stability Facility (EFSF) plays a key role in their considerations. The Finance Ministry wants the Luxembourg-based facility, headed by German economist Klaus Regling, to be provided as quickly as possible with the new competencies that were agreed upon at the crisis summit in late July.  Once that happens, there will be a good chance of protecting the rest of the euro zone from the disruptions emanating from a Greek default.

Preventive Credit

The German plans focus on two instruments. First, Schäuble's officials advocate the use of preventive credit lines, which would involve the EFSF issuing bridge loans to financially weak countries. Second, they want to provide financial injections for banks to stop them getting into difficulties.

Entire countries and their banking sectors could be protected with the two instruments, Schäuble's man in Brussels argued. The loans would help Italy and Spain, but also small countries like Cyprus, who could find themselves unable to borrow money from fearful investors following a Greek bankruptcy.

Banks in many euro-zone countries could eventually find themselves dependent on the billions from Luxembourg, because they would have to write down their holdings of Greek government bonds. Greek banks would suffer the most from the consequences of a national bankruptcy. For this reason, German officials argue, it is quite conceivable that Greek banks could still receive aid even after the Greek government itself had been cut off from EFSF assistance. As the financial crisis showed, banks are deeply interconnected across national borders. If one major bank fails, others can easily be dragged down with it.

Such consequences are to be expected regardless of whether Greece keeps the euro or withdraws from the euro zone. In reality, Athens would have no choice: The government could only hope to boost its languishing economy if Greece reintroduced its own currency and sharply devalued the new currency against the euro.

'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.

Hopeless Case

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.

Little Progress

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.

Missing Taxes

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.

Growing Calls in Germany for Greek Exit

While most of the peripheral countries are on the road to improvement, Greece threatens to slide into bankruptcy. Germany's coalition government of Chancellor Merkel's conservatives and the pro-business Free Democratic Party (FDP) has little sympathy for Athens' plight, because a Greek bankruptcy would also help to rectify some domestic political disagreements. Berlin's tough stance is primarily intended to make it easier for those CDU and FDP parliamentarians who see Greece as a bottomless pit to support the government's line in a key vote in the German parliament, the Bundestag, on reforming the EFSF on Sept. 29.

Senior CDU politician Peter Altmaier has already started referring to the near-bankrupt country as if it were separate from the rest of the euro zone. "Greece is an absolutely special case," says Altmaier. "No other country is in such a mess."

'The Greeks Have to Withdraw'

The approach could work. Some members of the German parliament who voted against the EFSF reforms in a test vote  at the beginning of last week have now changed their minds.

"We need the new instruments for the EFSF, especially in the case of a Greek bankruptcy," says Georg Nüsslein, an economic policy spokesman for the conservative Christian Social Union (CSU), the CDU's Bavarian sister party. Nüsslein believes that the EFSF reform is inevitable, as is Greece's departure from the euro zone. "The Greeks have to withdraw," he says. "They can't get back on their feet while they are in the euro zone."

Many members of the coalition parties now share his opinion. Volker Bouffier, the governor of the western state of Hesse and deputy CDU chairman, argues that an option which would allow the Greeks to withdraw from the euro zone should be created as quickly as possible. "If the Greek government's austerity and reform efforts are not successful, we will also have to ask ourselves whether we need new rules to enable a euro-zone country to withdraw from the monetary union," he says.

In a meeting of CSU parliamentarians last Monday, German Interior Minister Hans-Peter Friedrich, who belongs to the CSU, also argued that this would be the best way for Greece to solve its problems. FDP financial expert Hermann Otto Solms has been calling for such an option for Greece for some time. If Greece does not fulfill the bailout's conditions, says Solms, "it might be better if the country withdrew from the euro zone."

FDP Opposition Could Derail Rescue Efforts

One thing seems virtually certain: The turmoil will not be ending anytime soon. On the contrary, the Bundestag has to vote on the creation of the permanent European Stability Mechanism (ESM), which is to replace the EFSF in 2013, by December at the latest. It will be another test for Merkel's parliamentary majority.

Opponents of efforts to rescue the euro within the FDP are already preparing for a battle over the upcoming decision. Before the Bundestag votes on the ESM, the FDP intends to poll its roughly 66,000 members on the issue. "The discussion within the FDP over further bailout measures for over-indebted countries in Europe is an important political question that requires a broad discussion in the FDP," reads a letter that was delivered to FDP General Secretary Christian Lindner last Friday afternoon.

The signers of the letter included both the indefatigable euroskeptic Frank Schäffler and Burkhard Hirsch, a veteran FDP politician.

If one-third of party members take part in the poll and the majority votes against the ESM, this will be the party's official position. If that happens, it will put an end to the CDU/CSU-FDP coalition's efforts to save the euro -- and to the coalition itself.


Translated from the German by Christopher Sultan
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