The Mother of All Bubbles Huge National Debts Could Push Euro Zone into Bankruptcy
Part 3: Calls to Eject Greece from the Euro Zone
The Christian Social Union (CSU), the CDU's Bavarian sister party, even went a step further. Hans Michelbach, one of the party's financial experts, proposed an international creditors' conference to discuss the debt restructuring.
The mood was no different among the liberals. At the FDP party convention in Cologne on the weekend before last, Chairman Guido Westerwelle barely succeeded in rebuffing a petition to eject Greece and other countries with high deficits from the euro zone. After all, what would be the implications of such a step? It would trigger a panic in other shaky euro-zone countries, investors would pull out their money and it could lead to more bankruptcies.
FDP finance expert Frank Schäffler proposed early on that Greece ought to sell its islands to pay off its debt. And veteran FDP politician Burkhard Hirsch said that he wanted to return to Greece "the option to devalue its own currency."
German Economics Minister Rainer Brüderle, while on an official trip to Brazil last week, only added to the confusion. Speaking from Sao Paulo, 10,000 kilometers (6,250 miles) from Germany, the FDP politician mentioned figures relating to the scope of the planned bailout package. The only problem was that the figures hadn't been coordinated with other members of the government. He also announced that he planned to make a stopover in Portugal on his way home, so as to gain a "direct impression" of the crisis on the ground.
Brüderle was apparently doing his best to fuel the growing panic in the financial markets, said horrified members of his party in Berlin.
Consternation in the US
The Germans' misguided crisis management was met with consternation worldwide, among European partner countries and in the United States. At a recent meeting of G-7 finance ministers in Washington, US Treasury Secretary Timothy Geithner told Jörg Asmussen, a senior official in the German Finance Ministry who was representing a hospitalized Schäuble, that it was time for the Germans to shed their reluctance.
The Greek problem needed to be resolved quickly, Geithner demanded, adding that it was Europe's job to fix the problem and that Germany, as the euro zone's largest economy, was particularly responsible. If the Germans wasted any more time instead of coming up with a quick solution, he said, other countries would run the risk of catching the Greek virus.
The US government wasn't just motivated by compassion for the Greeks. In fact, Washington is worried about being drawn into the vortex of national bankruptcies itself. The national debt has exploded in the United States in the last two years, more than in almost any other country, because the government has had to spend hundreds of billions of dollars to support the economy and banks.
Geithner fears that investors could also at some point lose confidence in the soundness of American government finances. According to a strictly confidential IMF document, referred to internally as an early warning exercise, the US's finances are still considered sound -- with, however, some qualifications.
Growing National Debt
The United States is still capable of fulfilling all of its obligations, the document states, but it also points out the worrisome rate at which the national debt is growing.
Germany is given high marks, and without qualification. According to the IMF report, Germany has come through the crisis relatively well, and its debt has not grown by nearly as much in other developed countries. In the case of Greece, however, the IMF sees a bright red warning light, and its conclusions for Portugal and Spain are also alarming. In both countries, state finances have deteriorated ominously recently, the IMF experts conclude.
For these reasons, an international rescue effort was unavoidable, leading IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet to launch an unprecedented public relations campaign. Appearing in Berlin last Wednesday, the two top representatives of global finance told the reluctant members of Germany's parliament, the Bundestag, how serious the situation is. Strauss-Kahn's Washington experts estimate the Greeks' financial requirement at 50 billion a year, in a worst-case scenario. That scenario will occur when private lenders refuse to lend the Greeks any more money. The IMF bailout program would total 150 billion over a three-year period. During this time, the IMF would contribute 27 billion, including 15 billion in the first year alone.
The IMF is bracing itself to remain in the country for 10 years, until the economic reforms are complete and have come to fruition. For the Greek government, the IMF's presence in Athens will deprive it of a significant amount of its power.
After having briefed the financial experts at the Bundestag, Strauss-Kahn met directly with the chancellor. The Germans' hesitation had already made the Greek bailout significantly more expensive, the IMF director complained. The Frenchman wasn't impressed by Merkel's argument that she has to make allowances for the Federal Constitutional Court's skeptical stance toward euro zone bailouts (a number of legal experts have already threatened to file a constitutional complaint with the court if the Bundestag approves a law enabling state aid to Greece). "I don't buy that," Strauss-Kahn said privately after the meeting.
The international financial experts' efforts had their intended effect. The politicians in Berlin came around, and now everything is expected to move very quickly.
In a special meeting on Monday, the cabinet approved the German portion of the Greek bailout program. Now the package will be pushed through the two houses of parliament, the Bundestag and the Bundesrat, in expedited proceedings, with the first reading of the bill in the Bundestag expected on Wednesday. The two houses could vote on the bill as early as Friday, and German President Horst Köhler could sign it into law the same day.
At the same time, the government in Berlin is looking for people to blame for the poor management of the crisis, and some are beginning to point fingers at Finance Minister Schäuble. Merkel's most important cabinet member was barely present in Berlin in recent weeks. A paraplegic, he underwent routine surgery at the beginning of the year, but his wound was slow to heal.
Exhausted and Ill-Humored
He conducted his official duties from his hospital bed for almost two months. Schäuble was usually represented by Jörg Asmussen, a senior official in the Finance Ministry. Members of the current coalition government are suspicious of Asmussen simply because, as a member of the SPD, he served in the same position under Schäuble's predecessor, Peer Steinbrück.
But whenever Schäuble did become directly involved in events in Berlin recently, he came across, according to his fellow party members, as an exhausted and ill-humored veteran politician incapable of drumming up any enthusiasm anymore.
On the contrary, CDU and CSU members of the Bundestag resent him for having left them in the dark about the true extent of the Greek crisis for weeks, for repeatedly behaving like someone who was at the mercy of the financial markets and for failing to devise a common approach with the chancellor. Even during the previous grand coalition government, the relationship between the Chancellery and the Finance Ministry was better than it is now, despite the fact that the Christian Democrats control both institutions today.
There is already speculation on the back benches of parliament over how much longer Schäuble will remain in office. It is also noticeable that a potential successor appears to be jockeying into position. Roland Koch, the CDU governor of the western state of Hesse, who would have liked to be named finance minister after last September's parliamentary election, pithily summed up the widespread discontent with Berlin's crisis management in an interview with the Berliner Zeitung newspaper last week. "The Christian Democrats and the federal government would be well advised to speak with one voice," he said.
- Part 1: Huge National Debts Could Push Euro Zone into Bankruptcy
- Part 2: Living Beyond Their Means
- Part 3: Calls to Eject Greece from the Euro Zone
- Part 4: 'Panic Is Slowly Taking Hold'
- Part 5: How Empires Fall
- Part 6: A Tough Course of Cold Turkey