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The Germans will not bail out Greece

In my view, there is little chance the Germans are going to allow the EU to ride to the rescue of the Greeks. All of the bailout chatter does not really consider the domestic political constraints in Germany.

First, a bit of quick background.  Germany was traumatized by two world wars and an intervening period of irrelevance and hyperinflation.  As a result, the German national psyche is very much geared toward preventing anything resembling these outcomes in future. First and foremost, that has meant integration with the rest of Europe and a weak military in order to prevent economic nationalism from becoming militaristic in Western Europe’s largest country. Second, this has meant an extreme aversion to high rates of inflation or anything that could lead to inflation or currency revulsion.

As a result, the Germans entered into monetary union with the likes of Italy and Greece despite these nations perceived fiscal profligacy, high inflation and weak currency policies. The thinking at the time was that the stability and growth pact (SGP) would rein in any excesses.  However, when France and Germany both breached the magic 3% federal government deficit hurdle of the SGP during the Schroeder government, all bets were off; now Italy and Greece could deficit spend and point to core Europe’s biggest nations as an excuse – and this is exactly what has transpired.

Now, it has to be remembered that the Euro was adopted in Germany without any democratic vote by the German electorate. It was imposed by fiat from the Federal Government unlike in Denmark where the Euro was put to vote before the electorate and rejected. In fact, there was a lot of concern in Germany at the time that the Germans would have rejected the Euro had it been voted upon – and this is the very reason a vote was not held.

Many ordinary Germans feel their good money is now being trashed. They already had a currency union between Ostmark and Deutsche Mark, with Western Germans submitting to a “solidarity tax” in order to finance the upgrading of Eastern Germany’s infrastructure. So, to this day, many Germans look at larger Euro notes to determine if they were printed by the Germans, Italians, or Greeks – sometimes rejecting notes printed in countries viewed with suspicion like Italy (see the Telegraph’s 2008 story on this here).

With this as background, you should see the 2009 election of the CDU/CSU/FDP coalition as a signal that the German government is unlikely to submit to a bailout.  With the FDP replacing the SPD in government, the likelihood of a Greek bailout decreases. The FDP is the libertarian junior partner in this new coalition (the same coalition which produced the SGP, by the way) and they are under enormous pressure from their constituents not to permit any bailouts.  If Germany allows German tax dollars to go to the EU in order to bail out the perceived profligacy of Italy or Greece, there would be riots.  Spain is another story – but Greece is known as fiscally profligate in Germany – so bailing them out is unacceptable politically. Let’s not forget that Germany has its own problems in banking as well.

That’s the politics of the issue in Germany. And I see this as important now that Greece is the country under pressure in Europe instead of, say, Austria. This is one reason I have predicted the IMF would likely be used as a ‘bailout’ vehicle.

However, Marshall Auerback has pointed me to a recent NYTimes article which gives more direct evidence of the thinking of German policy makers.  The article reports:

If Greece needs a bailout, it would be far better for it to seek one from the International Monetary Fund than from other euro-zone countries, Otmar Issing, a former top official of the German and European central banks, said Friday.

“I don’t think that the E.U. can impose the kind of sanctions that would be needed, and it would make Brussels too unpopular,” Mr. Issing said during an interview by telephone from his office near Frankfurt. “A better way is for Greece to approach the I.M.F. It is the only institution that can impose strict enough conditions.”

Mr. Issing was chief economist of the European Central Bank from 1998 to 2006 and one of its most influential executive board members. Previously he spent eight years as a board member of the Bundesbank, an institution that expressed doubts about the wisdom of expanding the euro zone beyond core West European economies.

Bailing out Greece would involve “a more or less disguised transfer of taxpayer money,” he said, “and I don’t see any support for that from the people in Germany or elsewhere.”

Bottom line: The Germans will not support a bailout of Greece via the EU.  Those who see this as a remedy are not watching the internal politics in Germany.

See The European problem from February 2009 for a more comprehensive Europe-wide view.  These issues are all still at play.

Update: Reuters has now confirmed the speculation about a bailout is premature. See FT Alphaville’s piece “Oh yes they will… oh no they won’t!”  Marc Chandler of Brown Brothers Harriman sent out a note this afternoon saying:

Greece and the EU have only just agreed to a strategy to address the deficit.  They have also worked out a review schedule as the program is implemented.  Additionally EU aid to Greece carries with it moral hazard and opens the door for aid to other countries, notably Spain and Portugal.  In related news, the German-based Spiegel On-Line has an article that is attracting market attention.  It claims that a large US investment house helped arrange a cross currency swap for Greece that helped to conceal another $1 bln in debt.  Although this amount seems relatively small given the huge debt and deficit problems, many suspect it could be just the tip of the iceberg.  It is not unusual for sovereigns, including Greece, to borrow in foreign currencies, like dollars, yen and Swiss francs and swap back into euros.  The article claims that the US investment house arranged a cross currency swap for Greece back in 2002 but gave exchange rates that in effect created for Greece an extra billion dollars.  Of course, the swap will have to be unwound, but likely was in effect off-balance sheet and was not picked up by the stats office.  Many observers have already noted problems with the Greek accounting methods which have sometimes not included defense spending in the budget calculations and have also sometimes not included the debt owed to hospitals under its social programs.  Greek bonds as well as the other weaker credits in the euro zone are rallying, but this could very well prove to be a one day wonder if we are right and no EU bail out will be forthcoming.  Market attention will focus on the Thurs EU summit, and euro vulnerable to disappointment.

I see it as unlikely that any deal – bailout via the EU, IMF bailout or backdoor help via quasi-fiscal measures from the ECB – can be reached unless Greece agrees to austerity measures. While this is the Eurozone – and that makes a difference – countries like Latvia will be looking to determine if Greece gets differential treatment.  And Spain, Portugal or Ireland would then be next in line. Any agreement must take these factors into account.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

19 Comments

  1. egghat says:

    I bet they (in my case we) will save Greece …

    http://www.ftd.de/politik/europa/:rettung-fuer-eu-land-deutschland-will-griechenland-retten/50071966.html#utm_source=rss&utm_medium=rss_feed&utm_campaign=/

    Sadly there is (at least for now) no specific info about *how* this help will look like. My guess is a Euro-bond that is guaranteed by all nations in the Euro-zone that should bring back Greece’s yield to normal levels.
    Greets from Germany.

    • Some aid is coming to the Greeks. That much I believe. The question is how much and in what form. A ‘bailout’? Don’t you think that’s unlikely?

      • daniel says:

        hopefully. They’ve already managed to crash the german bunds. How sad…

        Didn’t really sound like a bailout. Germans aren’t very happy about that. (at least me and the few who commented on wallstreet-online.de)

        http://www.spiegel.de/international/world/0,1518,676157,00.html

        but that’s not all

        http://www.spiegel.de/politik/deutschland/0,1518,676826,00.html

        a happy day for german taxpayers

      • egghat says:

        Define “Bailout” ;-)

        If the Germans (or all members of the eurozone) guarantee the greek bonds that is a bailout IMHO.

        I’d even do an arbitrage deal with greek bonds. Get some money (Bund) at 3% and buy greek bonds at 6%.

        (In fact that’s the kind of deal the greek banks have been doing for quite a while now: they lend their money at the ecb at 1% and buy greek bonds that yield 6% (well they did this a bit too early, but even at 3 oder 4% this was quite a good deal …))

        • right, egghat, that’s not a ‘bailout’ and its the ECB – doing it. That’s the sort of thing that I imagine is palatable – even though it’s a backdoor bailout.

          What I see as problematic is the direct transfer of money from the EU to Greece because the Greeks have proven to be unwilling to do fiscal austerity. Moreover, there are the Spanish and the Irish and the Portuguese who would want equal treatment.

          Let’s see what happens but I have already heard that the German government is distancing itself from the recent ‘bailout’ talk and are looking for other avenues of support.

        • As for a guarantee of Greek debt, I don’t see that as likely because the austerity quid pro quo is not forthcoming

  2. cs says:

    Edward, your post came 20 minutes too early. :)

    http://www.calculatedriskblog.com/2010/02/report-euro-zone-agrees-to-bailout.html

    They’ll probably try to disguise it, but I’m sure most of us know that Germany and France are the pillars supporting this bailout.

  3. Pkpetro says:

    Mr. T. Barber, FT’s Brussels bureau chief, in his post http://blogs.ft.com/brusselsblog/2010/02/germany-rescues-greece-but-demands-its-pound-of-flesh quotes Mr. Otmar Issing’s remarks on German TV that Greeks enjoyed “one of the most luxurious pension systems in the world” (!!!) I would also like to comment on Mr. Issing’s claims in his article “Europe cannot afford to rescue Greece” (FT, 02/15/2010).

    With regards to Greek pensions, rather than go into lengthy theoretical arguments or statistical data comparisons, I will describe my personal example. As a Greek ex-CEO and professor of economics and management, I received at the age of 65 a monthly pension of about 700 euros from IKA , which is the Social Security Organization for employees of the private sector (though I admit that public employees receive somewhat higher pensions). It would be interesting to compare my pension with Mr. Issing’s, or with German or other northern European pensions…

    As to his previously mentioned article:

    Everything he denies in the first paragraph of his article (namely that other EU countries will follow if Greece collapses, that speculators, and I should add their collaborators, are doing their work and have identified the next candidates, -as Ms Lagarde and Mr Zapatero’s recent comments have confirmed-, that the EMU is at risk, and that solidarity is needed to rescue the Euro) are all now firmly established as facts in the minds of serious economists and policy makers.

    As to his claim that “a bail-out would violate EU treaties, I refer him to Article 122 of the Lisbon Treaty, or Art.119 of the EU Foundation Treaty.

    What he says in paragraph 4 of his article about the structural design flaw of establishing a monetary union without economic and political union, or “putting the cart before the horse”, as he says, and that what is now at stake is “the viability of the whole (EU) framework” contradicts his entire article. Indeed the Greek crisis is an opportunity for the EU to put the horse before the cart. And “solidarity” to Greece would be the first step. Anybody who is against solidarity is logically against the unification of Europe.

    The responsibilities of successive Greek governments have been amply reported in the media, and I will not deny many of the allegations, although there have been many other gross exaggerations, half-truths, omissions, or even inaccuracies, in addition to the ones I have already mentioned above. E.g. failure by many to focus on the responsibilities of Germany and other developed countries for the global and internal EU imbalances, the beggar-thy-neighbour currency and trade policies of major countries, the “deficit fetishism” of the EU commission and some EU governments, the strong-euro monetarist policies of the ECB, the fact that many countries have similar deficit and debt figures as Greece, the questionable record of the rating agencies and their role in all of this, that the EU will not bail out Greece because they love the Greeks but for their own self interest (over 200b. euros worth of Greek bonds and other receivables are held by EU banks and companies), the fact that the currency swap with Goldman-Sachs was arranged after Greece had joined the EMU, not before, and that it was then acceptable by Eurostat, and was used by many other EU countries, that there are still no clear, uniform and standard accounting rules for national budget preparation to be followed by all EU countries, or procedures to monitor them, and therefore budgets are not comparable, or “credible” for that matter, etc.

    With respect to the issues raised in Mr. Issing’s article and Mr. Barber’s post, and in support of my comments here, I do want to refer you all to some very important recent interventions by US economists, such as Rogoff, Stiglitz, Eichengreen, Feldstein and Krugman .

    In the Guardian (Jan. 25, 2010), Professor J. Stiglitz says that “A principled Europe would not leave Greece to bleed. Unless it is one rule for the big and powerful and another for the small, the EU must stand behind Athens’ new leadership”.

    Professor P. Krugman has also made useful contributions to the problem. (See “Anatomy of a Euromess” Feb. 8, 2010 in his NYT blog, and “The real reason for the euromess” in the Guardian Feb.15, 2010, with the subtitle “Greece and other European nations are in trouble because policy elites pushed the continent into adopting a single currency”.

    In Project-Syndicate (02/15/2010), Professor B. Eichengreen in his article “Europe’s Trojan Horse” says that “Germany is not innocent of responsibility for this crisis (and goes on to explain why.)“ (Germany) has benefited enormously from the creation of the Euro. It should repay the favor”. Also: Europe “will have to get over its past.” And Mr. Barber refers to “Greece’s horrific experiences under Nazi occupation” in WWII. Finally, it is true that in the Greek parliament, an MP has reminded the world that Germany has yet to pay the war reparations to Greece, which, I may add, would amount to about a quarter of the total Greek debt. As one whose father was among the 1390 civilians executed in Kalavryta in 1943, I think I am entitled to say: Yes. I agree that present-day Germans are not to blame for those atrocities. And, I also agree that we must get over our past, if only people like Mr. Issing will let us.