Photo Gallery: The Greek Austerity Tragedy

Foto: Vladimir Rys/ Getty Images

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

For months, European leaders have been trying to find a way out of the Greek debt crisis. But austerity is merely driving the country deeper into economic despair. Is it time for a radical rethink? Many think the answer is yes. By SPIEGEL Staff

It would have been hard for German Chancellor Angela Merkel to find a more appropriate setting from which to promote her policies for Greece . She is sitting in a wide leather chair in Berlin's Neues Museum, home to Egyptian treasures and classical antiquities. The ancient columns towering behind her lend the scene an Acropolis-like air.

It's Tuesday of last week, and Merkel has been invited by a foundation to join in a discussion on the future of Europe. A young woman stands up and identifies herself as a foreign student studying in Germany and a "despairing representative of a younger Greek generation." She says that, of course, she would like to return to her home country after completing her studies. "But whenever I make inquiries about work in Athens," she says, "I'm only offered jobs in Germany."

Merkel nods. The situation in Greece is "extremely difficult," she says, adding that she cannot imagine a currency union without the highly indebted nation. "I want Greece to keep the euro," she says. And then, unasked and unambiguously, she provides something akin to a letter of guarantee for the Greeks. "I would not participate in pushing Greece out of the euro," she says. "That would have unforeseeable consequences."

It was a clear message  at the beginning of a week in which those seeking to save the euro once again lost fundamental control over their drama . Europe's leaders had been hoping to finally present to their skeptical citizens a convincing and viable plan for rehabilitating Greece and fortifying the will to preserve the currency union in its current form at any price.

Growing Doubt

Instead, we are left with the outlines of a program that not even its designers believe in anymore. Finance ministries in Europe are growing increasingly skeptical about Greece's ability to reform, despite the passage on Sunday evening of a vast new austerity package in Athens. Efforts to get private creditors to participate in debt relief for the country have likewise been slow to make progress. And there is growing doubt among politicians in Berlin about the current rescue strategy -- as there is among the parties in Athens. Late last week, the populist LAOS party, the smallest of the three Greek parties in the current ruling coalition, announced it would no longer back the bailout deal and related austerity measures.

Europe is now paying the price for the inability of its leaders -- together with the International Monetary Fund (IMF) and its managing director Christine Lagarde -- have still not been able to agree on effective therapy for improving Greece's economic health. They share the belief that, given the unforeseeable consequences, a Greek exit from the euro zone should be avoided at all costs. But it remains unclear how the highly indebted country can be nursed back to health within the currency union.

In any case, the new program European leaders hammered out with their Greek partners last week would hardly seem to fit the bill. Although the ailing country will receive €130 billion ($172 billion), this massive amount of money won't necessarily make the country's rehabilitation any easier. The country's unsustainable mountain of debt will, of course become smaller, but that alone will hardly help. And while Athens makes even more cuts in wages, pensions and state expenditures, it isn't even remotely clear how this formula will return the Greek economy to growth. Fundamentally, Europe's strategy can be reduced to a single message: More of the same!

Yet after two years of fighting Greece's debt crisis, hardly anyone believes that this strategy will work -- not in Athens, Brussels or Berlin. German Finance Minister Wolfgang Schäuble stopped pretending long ago that he wasn't extremely annoyed by the stalling, delaying and squabbling of the parties in Athens. The same is true of Jean-Claude Juncker , the prime minister of Luxembourg who chairs the Euro Group, made up of finance ministers of the 17 euro-zone member countries. When asked whether he and his colleagues were slowly losing patience with Greece, he gave the curtest answer possible, saying only: "Yes."

The Ministers Were Annoyed

Last week, the party leaders that Greek Prime Minister Lucas Papademos had invited to his offices in Athens were back in top form. Plans had originally called for them to put their signatures on the new cost-cutting program by the beginning of the week. But, on Thursday afternoon, as finance ministers from the rest of the euro-zone countries were already making their way to Brussels to discuss Greece, they still hadn't reached an agreement.

The ministers were annoyed, Schäuble in particular. He was in favor of canceling the Thursday meeting altogether. But most of his colleagues insisted on holding it nonetheless. Still, it quickly became clear that no decisions of substance would result. "You don't need to wait around because there will be no decision (tonight)," Schäuble told reporters when he arrived outside the European Council building in Brussels.

As it turned out, Schäuble was right: The ministers couldn't make any decisions because some important documents were missing. A draft agreement on the debt relief agreement between Greece and its private creditors was missing as was an agreement about the most urgent austerity measures. Furthermore, the leaders of Greece's three coalition parties had failed to provide written pledges that they would abide by the decisions past elections scheduled for April. Most importantly though: The Greeks hadn't even submitted an application for fresh financial assistance.

The decision on the bailout package is now supposed to be made on Wednesday. But even the finance ministers doubt whether the second Greek austerity package will be enough. Solving Greece's problems, many have come to recognize, will likely take closer to 20 years rather than just 10.

'The Troika's Policies Have Failed'

The plan to save Greece, it turns out, is based on assumptions that have proven to be hopelessly optimistic. Europe's leaders had assumed that Greece would quickly return to economic growth. But the severity of the austerity measures demanded makes that doubtful. Cuts in salaries and social spending have resulted in a dramatic drop in demand, which has accelerated the economy's contraction. Tax revenues have plunged as a result, leading to the need for even more spending cuts.

That is hardly a recipe for coming to terms with the country's debt problem, particularly given the lack of clarity regarding the degree to which Greece's private creditors will participate in the new bailout package. The International Institute of Finance (IFF), which is representing private holders of Greek sovereign bonds, reached an agreement on voluntary debt relief with reports emerging on Monday that the debt swap would take place in March. But several details remain open and Germany's Finance Ministry is now saying that Germany won't give final approval for additional aid to Greece until those details are ironed out.

The agreement means that private creditors will have to write down between 70 and 75 percent of their claims. In exchange, they will receive new bonds with longer maturity periods and significantly lower yields. The new bonds will be guaranteed by the euro backstop fund, which provides added incentive for creditors to participate in the swap.

Yet it remains unclear whether a sufficient number of investors will ultimately go along with the deal. Only if 90 percent of private bond holders agree to participate will Greece be able to hit its target of €100 billion in debt relief. Financial insiders claim that the biggest resistance to the swap continues to come from hedge funds. They have insured themselves against a Greek insolvency and would actually profit should it come to pass.

Yet More Pension Cuts

Yet even as international investors are hesitant, the Greek population has passed its judgment. Greeks, it would appear, no longer want to be rescued if it means even lower minimum wages and yet more pension cuts.

The Athens-based left-leaning daily To Vima urged its government last week to break off the talks "immediately" and negotiate an alternative arrangement with the United States. Greece still had the "power to blow everything up," the paper said, adding that this was "the only remaining path."

As if to lend impetus to the radical suggestion, tens of thousands of Greeks joined together late last week in long protest marches through downtown Athens. Hanging from a small tree in Syntagma Square, across the street from the building housing Greece's parliament, was a banner reading: "We've had enough. We won't play along anymore."

The number of those who agree with such sentiments is growing -- even among those who actually support the reform process, such as Dimitris Daskalopoulos, the head of the Hellenic Federation of Enterprises (SEV). Daskalopoulos has himself been the target of paint-bomb attacks launched by protesters. But, now, he sits in his federation's headquarters not far from Syntagma Square -- protected by access codes and security gates -- and says: "The troika's policies have failed," referring to the representatives of the IMF, the European Commission and the European Central Bank (ECB) which have forced Athens to undertake austerity in exchange for the second aid package. Though it would have been unthinkable just a short time ago, his association now finds itself backing some of the same positions as the unions.

For example private sector wage cuts. According to the terms of the new pact, the Greeks are obliging themselves to cut the gross minimum monthly wage by 22 percent, from €751 to €568. Likewise, there is also talk of abolishing the 13th and 14th months' salaries in the private sector.

Suffocating the Last Functioning Bits of the Economy

The problem in Greece, though, says Daskalopoulos, are not the salaries and wages. Rather, it is the structures that make the country a problem case. The troika has failed, he says, to convince Greek politicians to accept the reforms.

There has indeed been practically no progress in opening the labor market, and the revenues generated by privatizing state-owned assets are lagging well behind projected targets. Whereas plans had called for such sales to bring in €5 billion in 2011, they only netted €1.7 billion. Still, this hasn't moved the troika or the Greek government to adjust their high targets for 2012: The plan calls for €10 billion in privatization proceeds for the year, half of which is supposed to come in the first three months alone.

Although legislators have passed one new tax law after the other, the Greeks continue to owe their state €42 billion in unpaid taxes.

The troika's new loan agreement also calls for Greece to cut 150,000 jobs from its massively bloated public sector, with 15,000 of those cuts to be carried out this year. The target for 2011 was even higher, but only 6,000 civil servants actually left their positions, and most of those would have gone into retirement anyway.

Instead of insisting on reforms in the places where they're needed, international creditors and their austerity measures risk suffocating the last functioning bits of Greece's private sector, warns SEV chair Daskalopoulos. "If we continue the way we're going, we'll be left with no foundation at all for economic recovery."

Politicians, meanwhile, are trying first and foremost to save the one thing that in all likelihood can no longer be saved: their own power.

Antonis Samaras, leader of the conservative party Nea Dimokratia, told television cameras during last week's 13-hour marathon negotiation session that he couldn't support the pension cuts required by the new agreement -- only to accept all demands a short time later.

A date for the upcoming elections has not even been set, but one thing seems certain already: Angry voters will make short work of the established parties. Socialist party Pasok, which held the position of prime minister with Giorgios Papandreou until November 2011, currently manages just 8 percent support in public opinion polls. Samaras of Nea Dimokratia is putting his all into an attempt to still achieve his great dream of becoming prime minister. His party is currently at 30 percent in the polls, but that number is dropping.

Growing Frustration in Berlin

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."


Translated from the German by Ella Ornstein and Josh Ward
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