Thursday, September 12, 2013

Germany and Greece: the next round of political crisis

The German parliamentary elections are a week from Sunday. Unless there are really unexpected developments, that will allow Chancellor Angela Merkel to go back to wrecking the economies of the southern eurozone with fewer distractions. If recent history is any measure, the SPD and the Greens will continue to support her disastrous austerity policies for Cyprus, Greece, Ireland, Italy, Portugal and Spain. Maybe accompanying their support with an occasional grumble about how Angie should pay more attention to youth unemployment.

Megan Doherty comments on the disastrous drift of the political elites in Germany (Germany’s Leadership Question on the Eve of Elections GMF Blog 09/11/2013):

In the run-up to federal elections, Germany confronts a leadership problem. In the 19th century, Germans debated their unification and role in Europe. Today, journalists, commentators, and policy experts across Europe and the world have reframed the German Question, arguing that a lack of decisive leadership during the euro crisis is now the biggest threat Germany poses to its neighbors.

Yet with less than a month before its elections, what is Germany’s leadership question really about? "I will probably be the first Polish Foreign Minister in history to say so," Radek Sikorski declared in November 2011, "but here it is: I fear German power less than I am beginning to fear German inactivity." The German commentator Jakob Augustein concurred, calling his countrymen "stubborn and egotistical". The crux of "the reluctant hegemon's" problems, argued the Economist, stems from discomfort with the very idea of leadership: "Germans are deeply ambivalent about their growing role in Europe and generally uncomfortable talking about leadership. The mere vocabulary is fraught with historical echoes."
But the problem of German's leadership of the EU and the eurozone is not one of vague national characteristics, as those paragraphs might suggest. The idea that Germans in general have "discomfort with the very idea of leadership" strikes me as silly.

The actual German leadership problem is the real existing leadership they are exercising in the euro crisis. Doherty is on firmer ground here:

And herein lies the crux of Germany's leadership problem. German leadership meets the first criterion. While Germany may not have supported widespread privatization, championed a full single market for services, or advocated for the creation of a banking union, its insistence that fiscal discipline be applied across southern Europe and its reluctance to pursue policies that would lead to greater debt and inflation are, in fact, forms of action.

Germany's problem is that outside the European Commission, the International Monetary Fund, and a few countries like Austria and Estonia, no one trusts these policies. During the economic bailouts of Greece and Cyprus, Germany appeared to impose its will rather than collaborate. Its leaders have done little to reshape the common perception in Germany that southern Europeans' laziness triggered the crisis, without which they lack a mandate at home that would allow more radical reforms across Europe. And perhaps most telling, Germany has not tried to reverse the perception that it has a leadership problem, suggesting an obliviousness altogether. [my emphasis]
I would go further and say that the German leaders and media have to a large extent actively encouraged the idea that the nations targeted by Merkel's austerity policies are inferior in their economic models and in general character and thus should look to Germany as their model. And taskmaster.

A new round of aid to Greece is coming up soon, with a new round of austerity negotiations to accompany it.

Wolfgang Münchau in Die Krise nach der Wahl Spiegel Online 11.09.2013 points out an important feature of the previous Greek debt "haircut" (debt reduction). It affected private investors (PSI or private sector involvment). But cutting down Greece's debt burden, now at 170% of GDP, to a manageable level would also need to involved a haircut for debts held by other governments, like Germany, or OSI/official sector involvement.

Münchau sees no likelihood that either Merkel or the SPD will agree to such a step.

But he thinks they might go for what is essentially an accounting trip, a zero-coupon loan which would never have to be paid back and on which the borrower (Greece) would not have to pay interest. Münchau says this would mean that it wouldn't have to be booked as a loan on Germany's books. He thinks Merkel will see this as something she might be able to pull off. Or some closely related maneuver.

The point would be to give Greece a transfer for money that could be half-plausibly faked up to not look like one, thus making it politically more acceptable in Germany. But he doesn't think it will accomplish the level of de facto debt reduction needed. He calls it "nicht nur undemokratisch, sondern auch ökonomisch problematisch" ("not only undemocratic but also economically problematic.")

I'm thinking Angie won't lose any sleep over the "undemocratic" part.

Yanis Varoufakis notes in an interview for which he provides the text at his blog (Was Chancellor Merkel right (about Greece)?) 09/02/2013):

Is the scale of adjustment that Greece is facing (after accepting previous bailouts) unprecedented?

Yes. Especially in view that the bailouts did not have the purpose of solving Greece’s problems. The original bailout was a cynical ploy for transferring losses from the books of the German and French banks onto the shoulders of the Greek, German and French taxpayers. The second and third bailouts were merely attempts to hide the truth about the first one.

Would you say that it is remarkable that Greece has been able to (just barely) keep social cohesion?

Not really. A Great Depression tends to depress people psychologically to an extent that they become ready to accept the unacceptable. At least for a while.

Would Germany have held together if it had to implement such draconian measures?

Under no circumstances. In any case, the German leadership was the first to set aside the Maastricht limits when it had a choice between a deep recession and a milder one. Of course, it could afford to do this being the Eurozone's surplus nation. As is always the case, the rules do not apply equally between the surplus and deficit nations of any currency union of fixed exchange rate regime.
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