Friday 18 August 2017

The paymaster: Angela Merkel

Beware of Greeks bearing gilts, says German leader as she refuses to guarantee bailout

THIS week's agreement by EU leaders to bail out Greece as a "last resort" focused even more attention on German Chancellor Angela Merkel.

By refusing to countenance an EU solution to the Greek crisis she has heightened hostility to what many other European countries see as Germany's "mercantilist" economic policies.

On Thursday, EU leaders agreed to lend Greece up to €22bn should that country be frozen out of the international bond markets due to its high debt levels. The agreement, so the optimists hope, opens the way to a hybrid bailout of Greece, which has been in the grips of a financial crisis ever since it revealed last December that it had been faking its economic statistics.

Under the terms of this week's deal, the EU will contribute two-thirds of the €22bn by way of bilateral loans to Greece with the International Monetary Fund (IMF) meeting the balance. European Central Bank president Jean-Claude Trichet talked up the deal stating that: "I am extraordinarily happy that the governments of the euro area found a workable solution." He then went on to state that the agreement would allow Greece to "progressively regain the confidence of the market".

The initial market reaction to the announcement of the agreement was indeed positive, with the euro, which has shed more than 10pc of its value against the dollar since the crisis first broke, climbing more than a cent against the greenback.

Agreement

However, on closer examination it quickly became clear that there was less to the agreement than met the eye. While it sounded impressive on paper, the money will only be available to Greece as "a last resort".

Further complicating matters is the fact that if Greece actually needs the money, EU leaders will have to meet again and vote unanimously in favour of releasing the cash to the Greeks, whose national debt now exceeds €300bn.

So why, more than three months after the crisis first erupted, has the EU found it so difficult to agree on a workable bailout plan for Greece?

Instead there has been a series of stopgap measures, the successive failure of which has served only to undermine the euro and call the very future of the single currency into question.

The main heroine or, depending on one's point of view, culprit of the whole affair is Merkel. As the leader of Europe's largest economy, any Greek rescue package needs her seal of approval. So far she has proved extremely reluctant to do so. By inserting a requirement for a unanimous vote in favour into this week's deal she has ensured that she still retains the ability to refuse to financially support a Greek bailout should she wish to do so.

So why is Merkel so reluctant to sign up to a Greek rescue package?

It is hard to overstate the irritation felt by German public opinion at the profligacy practised by the Greeks and other peripheral eurozone countries, including Ireland. While the Germans worked and saved, the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) partied. Now that the bills have come due why should Germany pick up the tab?

As a German newspaper recently pointed out, while Greeks are protesting at their government's proposals to raise that country's retirement age to 63, Germany recently raised its retirement age to 67. Why should Germans subsidise the Greeks to retire four years earlier than they do?

Annoyance

But annoyance at the allegedly spendthrift ways of the PIIGS provides only a partial explanation for Merkel's reluctance to bankroll a Greek bailout.

When Germany agreed to the creation of the single European currency in the 1992 Maastricht Treaty, it inserted several clauses designed to ensure that the euro would be a worthy successor to the mighty D-mark.

Having lost two currencies to hyperinflation during the 20th century, the Germans were adamant that the euro would be a strong currency with inflation kept firmly under control.

Not alone would the European Central Bank be modelled on the Bundesbank and headquartered in Frankfurt, the Maastricht Treaty also stipulated that there would be no bailouts of eurozone countries that ran into trouble.

This was designed to ensure that thrifty Germans wouldn't end up paying for the excesses of wastrel Greeks, Spaniards or Irish. Unfortunately, while the eurozone architecture agreed at Maastricht may have succeeded in persuading the Germans to trade in their beloved D-marks for euros, it came with a potentially fatal flaw.

The euro is a currency without a state. This means that, while the 16 members of the euro have achieved monetary union (exchange and interest rates) , there has been no fiscal union (taxes, spending and borrowing).

In good times that doesn't matter. Now that we are in bad times, it most certainly does.

While there have been monetary unions that crossed national boundaries before, the historical precedents are not encouraging.

Every previous transnational monetary union (including the Anglo-Irish monetary union of 1826-1979) has ultimately foundered in the absence of fiscal union.

Indeed it has long been an article of faith among eurosceptics that the euro was a Trojan horse designed to ease the path towards the creation of a European federal superstate with the wily Brussels bureaucrats only waiting to use the opportunity presented by a eurozone crisis to create European fiscal union by the back door.

The eurosceptics reckoned without Angela Merkel.

The 55-year old Merkel, who has been chancellor since 2005, is the first German leader to come from the former East Germany.

Unlike many of her predecessors such as Konrad Adenauer, Willy Brandt, Helmut Schmidt and Helmut Kohl, her commitment to the European ideal has been lukewarm at best. In her five years as chancellor she has generally pursued a policy that might best be described as Deutschland uber alles.

First elected as chancellor at the head of a "grand coalition" of her conservative Christian Democratic Union party and the Social Democrats after the September 2005 general election, Merkel now heads a narrower centre-right coalition with the liberal Free Democrats following her victory in last year's general election.

Those who hoped that the ending of her reliance on the left-of-centre Social Democrats would result in a greater flexibility on Merkel's part have been disappointed.

An innate caution, a desire not to rock the boat, has been the hallmark of Merkel's tenure as chancellor.

This is generating mounting anger elsewhere in Europe. Her willingness to let the IMF take the lead in any Greek bailout has angered both the European Commission and the French government, not to mention the Greeks.

INDEED she has gone so far as to suggest eurozone rules should be altered to allow for the expulsion of errant members, a suggestion that has not gone down well in Brussels or other European capitals.

Merkel's unwillingness to lend anything more than token support to any Greek bailout has led to renewed criticism of what many claim are Germany's mercantilist economic policies. They argue that, with an annual export surplus of almost €150bn, Germany is sucking demand from the peripheral eurozone economies making it impossible for them to grow their way out of recession.

Nonsense, says Merkel, if only the rest of the eurozone could be like Germany!

It may not be winning her many friends abroad, but Merkel's policies play very well with German public opinion. Unfortunately, with much of the eurozone buckling under Germany's relentless squeeze on costs, the same can't be said for the rest of Europe.

Irish Independent

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