Is Germany bluffing on Greece?

ΠΗΓΗ: Bruegel

By Philine Schuseil on 15th May 2012

After the recent elections in Greece, German officials seem to seriously consider a Greek Euro area exit – at least this is what official statements from policymakers indicate.  Are these statements serious or is Germany bluffing on Greece?

We want to summarize their statements and compare them to what is being said in the German National Press and blogosphere, both of which appear much more skeptical about the possibility of a Greek exit.

The German minister of Finance, Wolfgang Schäuble, stated in an interview with the “Rheinische Post” on 11 May 2012 that Europe has the capacities to cope with a Greek Euro area exit. He said that Germany and its partners had learned a lot during the last two years and have put in place several protection mechanisms. Moreover, the risk of contagion to other countries has declined in the euro-zone and it has become as a whole more resilient. There is no other, easier way for Greece to remain in the euro-zone than implementing the reforms on which the member states agreed. 

According to Spiegel online, he declared recently that Greece cannot have the one (stable government) without the other (meeting their obligations). Moreover, he  said on Sunday 13 May 2012, that Germany would be a strange government, if it was not prepared for all possible scenarios in order to cope with them.

Foreign Minister Guido Westerwelle declared according to an article on Spiegel online that whether Greece remains in the euro-zone or not, lies completely in the hands of the Greek. If Greece did not follow the started reforms, he would not see that the outstanding tranches for Greece will be paid off. ECB board member Jörg Asmussen, told the Handelsblatt that Greece must pursue the agreed reform programme if it wants to remain member of the euro-zone. The chief executive of the Federal Association of German Banks (BdB), Michael Kemmer, also believes that the euro-zone could cope with Greece’s exit and that the immediate impact would be limited. However, Kemmer believes that an exit would result in risks of contagion and would reduce the confidence in the existence of the common currency. Even German ex-Finance Minister Peer Steinbrück (SPD) considers a Greek exit inevitable and underlines the importance to be prepared for it.

On the contrary, the German press does not share exactly the same position. 

The Frankfurter Allgemeine Zeitung  is aware of the negative impact a Greek Euro-zone exit would have on both the Greek as well as on the world economy and believes that there are currently still more reasons for Greece to remain in the Euro-Area rather than to exit.

In Die Welt, Martin Greive wrote on Sunday 13 May 2012 that while more and more bankers, politicians and economists speak of a possible Greek exit, one should not forget that this move will be highly expensive for Germany. This is particularly due to the fact that Germany would have to amortize the contributions already paid to Greece.

Daniela Schwarzer  looks  at the possible Greek exit from a Euro area perspective and concludes that the latter should do what it can to keep a defaulting Greece within the currency union rather than letting it exit. Apart from the negative impact this would have on Greece, an exit would have considerable negative effects on the European Union. First of all, the banking sector would be destabilized in the other member states. Euro deposits in a Greek bank would be worth a new drachma and the latter would see a strong devaluation. This would lead to a capital flight from other member states under pressure to countries such as Germany. 

Secondly, from a political point of view one cannot promote a possible Greek exit: leaving the Euro area but not the European Union is, first of all, not compatible with EU law and would thus need a political solution. Then, the co-operation with Greece, as a EU but not a Euro zone member state would be challenging. Thus, there is no reason for a default to entail an automatic exit from the Euro area.

Thomas Fricke wrote on 11 May 2012 in the Financial Times Deutschland that one cannot make a comparison between Greece in 2012 and Germany in 2005, although there are some similarities such as the high unemployment rate and the hard, but needed reforms. However, there are still important differences: the unemployment rate is substantially higher in Greece and the political parties are more radical. What Greece needs are realistic targets to reduce the deficits in the medium term and no brachial experiments.  It is absurd to blame Greece now that they did not render possible, what in fact is impossible. Otherwise, this will lead to a panic euro-exit, which could drag Germany itself into the abyss.

However, “Acropolis Adieu! Why Greece must leave the euro” reads the front-page headline of the German magazine Der Spiegel on Monday 13 May 2012. It is time to realize that the rescue policy has failed, notably due to the disinterest of Greek politicians to implement reforms, and that Athens should now exit the currency union. Preparations are already made both at EU and at national level: the “Taskforce Griechenland” is working since one year in the German Ministry of Finance in order o prepare a possible Greek exit. Nevertheless, European solidarity is not bound to the Euro and the EU27 instead of the euro-zone members will contribute to support Greece also after an exit. This would be an advantage since it would include Great-Britain as contributor.

It will be interesting to follow the evolution of the public opinion, whether or not this stays in line with official declarations.