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German Patience With Greece on the Euro Wears Thin

Published: May 9, 2012 | 8:08 am
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Just weeks ago, the idea that Greece would leave the euro zone was almost unthinkable. Now, with Greece’s newly empowered political parties refusing to abide by the terms of the country’s international loan agreement and Europe’s leaders talking tough, that outcome is looking increasingly likely.

Germany’s devotion to the euro and the European Union runs extremely deep and cuts across the political spectrum. But the frustration with Greece here is undeniable. There is a growing conviction that it is up to Greece to follow through on its commitments, that Europe is done negotiating.

“Germans are now predominantly of the opinion that they would be better off if Greece left the euro zone,” said Carsten Hefeker, a professor of economics and an expert on the euro at the University of Siegen. “If the country really is continuing on the path they are taking now, it would be hard to justify keeping them in. How do you deal with a country that says we don’t want to keep any of the commitments we have made?”

Yet, on Tuesday, the leader of the leftist Greek party that won the second-most votes in Sunday’s elections declared the loan agreement “null,” and refused to enter a coalition with the formerly dominant parties that supported it. With the so-called troika of lenders — the European Union, the European Central Bank and the International Monetary Fund — demanding budget savings of $15 billion by the end of June, the issue seems likely to come to a head soon.

The tone of debate over Greece is sharper and more antagonistic than it is over Spain or Italy. Discussions of Spain in the German news media tend to focus on the suffering stemming from the extremely high unemployment and particularly the youth unemployment rate, and the government’s efforts to cut deficits in spite of a contracting economy. Reports on Italy emphasize the competitive industries in the north and the progress made by its technocratic prime minister, Mario Monti, to make structural reforms.

Greece, on the other hand, is roundly criticized for lying about the true state of its finances again and again, before and after joining the euro zone, and its failure to take any of the numerous steps demanded by its creditors to modernize its economy and — a particularly sore point — its tax collections. Its status as a special case is underscored time and again.

Perhaps the one card Greece has to play is the danger its exit could pose to other, much larger members like Spain and Italy, with far greater consequences. If Greece were pushed out, Mr. Hefeker said, the bond markets would start betting on the next country to be kicked out. “Then Spain or Italy would be put under pressure, and the danger would be of the whole euro zone collapsing,” he said.

There is another, nonfinancial calculus as well. “The political cost of the country leaving the euro zone would outweigh a lot of the economic ones,” said Almut Möller, a European analyst at the German Council on Foreign Relations.

Europe has muddled through previous euro crises, and that could happen again. But the options are few and unpalatable. One possibility, analysts said, would be for the troika to pay Greece just enough to keep government services running, withholding the rest until the political situation clears up. In what some consider the most likely possibility, the creditors would agree to renegotiate the terms of the bailout and the new Greek government would go along.

But there is also the possibility that the troika will finally refuse to hand over any money whatsoever, something the I.M.F. did a decade ago in Argentina, when Buenos Aires failed to meet its bailout terms. If this happens, many experts say, Europe will be ready.

“Preparations are quietly being made for the contingency if Greece decides that it’s better off with its own currency,” said Heribert Dieter, an expert on international financial markets at the German Institute for International and Security Affairs.

Most Greek debt is now held by the troika, easing the threat to the banks, and rescue mechanisms are in place to ease speculative pressure on other members of the euro zone. “Those measures could be used temporarily to take speculative pressure away from Italy and Spain,” Mr. Dieter said. “These are the two candidates that may need to be sheltered for weeks, maybe months, but not years.”

While leaders in Berlin continued to support publicly the official line that member states would be able to solve their own problems, lower-level staff members increasingly discussed among themselves what would happen if Greece and other countries had to leave the euro zone.

“Nothing is in writing,” said Guntram B. Wolff, deputy director at Bruegel, a research group based in Brussels, “but people really are clearly and openly talking about this.”

Mr. Dieter said: “The mood in German government circles has become a little less enthusiastic, to put it mildly. Just last Friday, Finance Minister Schäuble said on the record that membership in the European Union is not compulsory, it’s voluntary, and Greek society has a choice.” He added, “I think this is a good reflection of the changing mood of German policy makers.”

“You can’t be a member of the club and disregard the rules,” he said.

Mr. Wolff said that even with Greece’s departure, the structural problems of the euro zone, which ropes together economies of vastly different levels of competitiveness, are going to remain. European policy makers are “still in a state of denial,” he said.

“They don’t acknowledge openly that the only way this is going to work is if significant transfers of wealth are made from north to south.”

This story originally appeared in The New York Times


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