German Chancellor Angela Merkel on March 17 called for the creation of a mechanism for the eurozone to remove member states who repeatedly fail to comply with the monetary bloc's fiscal rules. Given the complexity of creating such a mechanism, Merkel's statement is meant to qualify a Eurogroup plan to give Greece financial assistance if needed and scare Greece straight.
German Chancellor Angela Merkel said March 17 that the debt problems currently facing the eurozone needed be dealt with at their roots, adding that the eurozone must have the option of removing from the currency bloc member states who repeatedly fail to comply with governing fiscal rules. Merkel's words are even harsher than those of German Finance Minister Wolfgang Schaeuble, who in a March 12 editorial said states that fail to narrow their budget deficits and regain competitiveness "should, as a last resort, exit the monetary union." Whereas Schaeuble suggested such members should leave the eurozone, Merkel explicitly called for means to vote them out. Furthermore, while Schaeuble's suggestions have drawn attention mostly by Europe's technocrats, Merkel's words carry far more political weight and will ring loudest in Athens' ears. The proximate cause for Merkel's sobering words likely was the Eurogroup (the group of the eurozone's finance ministers) meeting March 16, at which Luxembourg Prime Minister and Eurogroup President Jean-Claude Juncker suggested the most official and explicit bailout plan for troubled eurozone member Greece to date: "What will happen if necessary, and we're still convinced it won't be necessary, is that we'll reach an agreement in the eurozone to offer bilateral support in a coordinated form." The plan is still very vague, but Juncker's comments do confirm that there is a plan to provide Greece with bilateral financial assistance if the need arises. As STRATFOR has emphasized, the eurozone's Greece strategy is to resolve the problem in the cheapest, least politically difficult way possible. The eurozone (read: Germany) has therefore supported Greece with political statements, but has refused to explicitly outline a bailout plan or put a number on a package. The idea is that merely implying a bailout would sufficiently ease markets and financing conditions enough to obviate the need for an explicit one. The strategy allows Germany to keep Greece on the path of fiscal reform by injecting a degree of uncertainty, while retaining the bailout option as a last resort. However, now that there is some sort of agreement on financial assistance, Germany is back to the classic carrot-and-stick routine, except this time the "stick" is not merely deficit procedures — it is removal from the eurozone. Providing financial assistance to Greece is utterly verboten in Germany. Merkel's pronouncements about the eurozone's need for an option to release a member from the bloc are therefore a reminder that while bilateral support ostensibly is on the table, Greece does not want to have to call upon it. However, given the practical hurdles of actually creating a mechanism to remove financially non-compliant members from the eurozone, Germany's talk about voting such members out is hyperbole meant for domestic consumption and to scare Greece and the rest of "Club Med" straight. Actually establishing such a mechanism would require amendments in a new treaty that would have to be renegotiated and agreed upon by all 27 members of the European Union (leaving the eurozone at this point would also mean leaving the EU). Not only would that take an enormous amount of time (if history is any guide), but many powerful EU members — such as Italy and Spain — whose fiscal situations are not altogether unlike Greece's would want to (and could) scuttle any such treaty.