JUST OVER a year after Greece was plucked from the edge of the abyss by the first sovereign rescue in the euro zone, the country’s worsening financial emergency is again convulsing Germany.
With the whiff of default in the air, the big question right now is whether Athens is given another lifeline or whether it embarks down the rocky road of debt restructuring. All signs suggest Chancellor Angela Merkel may reluctantly support a second bailout, but this presents serious political risk for a leader who has been under electoral siege.
Although glorious sunlight on the streets of Berlin seems to reflect the glow of Germany’s export-led boom, in government buildings, banks and beyond, the talk soon turns to the dreaded Greek conundrum.
After a secretive meeting of top finance ministers in Luxembourg last Friday, it is now beyond argument that the bailout is not working. Finding a way around the problem is less clear, however, as a precarious debt drama is played out in political real time.
The evaporation of market confidence means Greece will not be able to tap financing next year as foreseen in its rescue plan. This is toxic because the plan assumes private investors will lend as much as €30 billion to Greece in 2012 to refinance debt and keep the wheels of state turning.
Greece will need more bailout loans – a sum of €60 billion has been mentioned – or it may have to embark on a drastic default to cut its liabilities.
Although there is plenty of criticism to be heard over a slowdown in the economic reforms pledged by Greek prime minister George Papandreou, the pressure is on to find a solution.
“There is a consensus among German economists by now, except for some exceptions, that a default of Greece is necessary and will happen in the near future,” said Ferdinand Fichtner, senior research associate at the German Institute for Economic Research.
“There is not a consensus between policymakers and economists and there doesn’t seem to be a consensus between different policymakers,” he added.
“A substantial haircut is the only thing which will save the country from an extremely prolonged period of weak growth and unstable public finances . . . The sooner the better to be honest, because every day we miss, every week will cost the Greek government and the Greek taxpayers and the Greek population money.”
Against that stands the fact that Merkel gave her blessing only weeks ago to a bailout scheme overhaul which aims to avoid any default before 2013. Not only is her own credibility and that of all euro zone leaders on the line here, but any step to force losses on private investors could spark contagion yet again in the euro zone.
This explains the cascade of dire warnings about the evils of default from the European Central Bank in Frankfurt. In their own way, the force and frequency of such warnings illustrates the seriousness of the debate which is now under way.
The sense, however, is that Merkel will stick to her habitual caution, even if her style is to deal with problems in a step-by-step manner. Although a Greek approach to the European Financial Stability Facility seems likely in the wake of the Luxembourg talks, hard experience suggests the chancellor will not dash to the country’s aid.
Bailouts for indigent Greeks are not the stuff of popularity in German politics, but the alternative may be to run the risk of uncontrollable turmoil. Europe’s leaders have declared the battle won many times before, but their hopeful rhetoric never matched reality.
More than most, Merkel knows just how heavily the instability weighs.
