Greece, Germany, EU: The Intensifying Bailout Debate
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As Greece's debt crisis continues, the debate in Europe over how to handle the situation has intensified. The two options under consideration are an International Monetary Fund bailout plan and a still-vague eurozone-wide effort. Whichever option is chosen, the debate threatens to create a rift between France and Germany, cause tensions within Germany's ruling party and affect the stability of the eurozone and the future leadership of the European Union.
As the debt crisis in Greece continues, the debate over a potential Greek bailout has hit fever pitch in Europe. The two options on the table are a still-unspecified eurozone-wide effort — which EU Commission President Jose Manuel Barroso seemed to support in an interview with France 24 TV to be aired on March 20 — and a potential International Monetary Fund (IMF) bailout plan, which German Chancellor Angela Merkel gave tacit support to on March 17 in a speech to the German parliament. The question of how to deal with the Greek crisis has paralyzed Europe since December 2009 but now also threatens to divide European heavyweights France and Germany, as well as Germany's ruling Christian Democratic Union (CDU) party. At stake is not only the stability of the eurozone but also the future of leadership of the European Union. Prompted by Athens' massive budget deficit of 12.7 percent of gross domestic product (GDP) in 2009, the EU forced Greece to enact extreme austerity measures meant to trim its budget deficit by 4 percentage points in 2010. This has caused considerable instability in Greece, with two nationwide strikes since the crisis began and protests that turned violent on several occasions. Additionally, the public utility union GENOP-DEH has planned a 48-hour strike starting March 24 that could lead to blackouts across the country, and further strikes are possible after Easter. Speaking to the severity of the crisis, Greek Prime Minister George Papandreou said on March 19 that "with all honesty… we are one step from being unable to borrow" and implored the country's unions to not put any pressure on the Greek government.
Pressures on Greece
Pressure also is mounting for Greece to raise around 18 billion euros ($24. 3 billion) to repay bonds maturing on April 20 and May 19. Papandreou has maintained that Greece does not need a bailout but rather help from the eurozone in order to borrow at "normal" interest rates (which, in STRATFOR's view, constitutes financial assistance). The current rates determined by the market are already "normal," in that they are pricing in the increasing risk of potential Greek default. However, Greek politicians have a point that elevated borrowing costs undermine the efficacy of Athens' unpopular austerity measures. Since a smaller, expensive deficit can be just as problematic as a larger, less expensive one, Athens has therefore suggested the eurozone provide a facility that would offer subsidized loans at below market rates. This is why Papandreou and other Greek officials have made it clear that the IMF remains an option if a eurozone solution to Athens' fiscal woes cannot be achieved — an outcome that STRATFOR forecast in mid-2009 Athens could face. Greece essentially has given the EU leaders until the March 25-26 head of state summit in Brussels to create a clear plan for a bailout. If the EU has not come up with a solution by then, Athens has threatened to go to the IMF, where it will be able to count on approximately 3.25 percent interest, compared to nearly 6.5 percent the international markets are demanding to purchase Greek debt. Furthermore, an IMF plan would come with clear demands from the international lender for austerity cuts that would give the Greek government political cover with which to deflect the criticism of the harsh austerity measures. At the moment, Athens is ostensibly going through budget austerity on a voluntary basis, opening it up for criticism from labor unions and opposition that the government is getting nothing in return for the severe economic pain Greek citizens are experiencing. However, the possibility of the IMF bailout has created controversy for the EU. While Barroso maintained in his interview that accepting an IMF bailout for Greece is "not a question of prestige," it very much is. The eurozone is — save for a handful of island nations and perhaps Portugal — a monetary union of advanced industrialized EU member states. Forcing a member to go to the IMF hat in hand would be a severe blow to the eurozone's prestige and the euro's claim as an alternative to the dollar in terms of stability if not volume of use. The eurozone had represented a hallmark of stability at the onset of the economic crisis in late 2008, especially compared to the economic imbroglio in Central Europe. That image could erode if it refuses to help out one of its own. A failure on the eurozone's part to aid a member state could give pause to Central Europeans trying to enter the monetary bloc, particularly since it was IMF aid that helped alleviate the crisis in Hungary, Romania and Latvia.
Pressures on the European Union and Germany
Nonetheless, Merkel's statement on March 17 and subsequent comments from other German officials indicate that some factions within the German government are advocating that Greece seek support from the IMF. This stands in opposition to the official positions of France, the European Central Bank (ECB) and the European Commission, who prefer a European "in-house" solution. For these actors, the questions of eurozone prestige are paramount. The ECB and the Commission do not want their preeminence within the eurozone trumped by what is seen as U.S.-dominated institution. For French President Nicolas Sarkozy, the issue is also political and personal; his most likely 2012 presidential opponent, Dominique Strauss-Kahn, is the IMF managing director, and as far as Sarkozy is concerned Strauss-Kahn has had enough positive publicity since the crisis began. France also benefits from the aura of stability that the eurozone has exuded thus far and, along with other eurozone members bearing large debt burdens, could see rising debt service costs if the eurozone loses that aura. (click here to view interactive table) The issue has even created divisions within Germany. A spokesman for German Finance Minister Wolfgang Schaeuble — who is the authority on Germany's stance on the Greek bailout and, after Merkel, the most respected figure in the ruling CDU — said March 19 that Schaeuble "would view IMF assistance with great reservation." Schaeuble's view contrasts with that of Merkel, who is concerned with the CDU's slumping popularity and domestic opposition to spending money on a Greek bailout. These two viewpoints also represent Germany's choices in the current situation. On one hand, Germany is concerned with domestic stability and preserving its social economic model that emphasizes high employment and relatively high social spending. From this point of view, letting Greece go to the IMF would be prudent, as it would reduce Germany's role in financing the bailout and would be popular domestically. This view also takes into account Germany's economic recovery — which significantly stagnated in the fourth quarter of 2009 — and makes the argument that Greece should be left for the IMF to sort out. In opposition is the view that this crisis is Germany's chance to take the reins of the EU and eurozone. It will cost Berlin a pretty penny, both financially and domestically, but it is the only way to force the German model of fiscal responsibility on peripheral eurozone states and to give Berlin explicit control of Europe's economy. Schaeuble, who is adamant that eurozone member states obey fiscal rules set out by EU treaties, is therefore promoting the eurozone bailout option for a much different reason than France, the EU Commission or economically troubled eurozone member states. From Schaeuble's perspective, the bailout would give Germany the necessary tools to shape the eurozone as it wants to in the future. Of course, this strategy is not without roadblocks, since few countries would willingly cede sovereign control of fiscal policy to an outside body, much less a direct common market member. Ultimately, Germany cannot unilaterally veto a Greek application to the IMF for aid. Only the United States could do that, due to the weight it has in voting rights at the IMF. It may be politically unpalatable for Washington to be seen as bailing out a eurozone member state, especially at time when economic concerns are weighing heavily on domestic U.S. politics. However, considering that the United States has already contributed to IMF bailouts of a number of EU member states, and considering the powerful Greek diaspora in the United States, it is not clear Washington would block the IMF bailout of Greece. The question therefore is which Germany will be present at the March 25-26 EU heads of government meeting. If it is the Germany concerned with domestic stability and preservation of its current social/economic model, Greece likely will be forced to go to the IMF. This will be to the chagrin of France and could cause tensions in the Paris-Berlin axis that dominates Europe. However, if it is the Germany looking to assert its leadership of the EU, the Greeks will be able to count on a eurozone solution. From the perspective of European leadership, this too may cause problems in the Paris-Berlin axis, albeit in the long term. That said, it is not clear Athens should prefer the eurozone solution, as Berlin could demand more than just a pound of flesh in return for its support.
Greece, Germany, EU: The Intensifying Bailout Debate