Germany: First the penalties, then the European Monetary Fund

Germany’s finance minister Wolfgang Schäuble wants to save the euro but he doesn’t seem to be very flexible about his negotiating tactics. He says Germany will support Greece if default is imminent, but they will receive nothing until then. The Frankfurter Allgemeine (FAZ) put it this way after it interviewed him in an article appearing today:

Wolfgang Schäuble wants to save the euro. Sinners in the monetary union should be punished more severely. Only then can a fund with which the EU can come to the assistance of debt sinners come into being.

I guarantee you this is not going to go down well with the Greeks – or the ECB for that matter.  While his stance makes sense, especially given German opinion domestically, Schäuble acts as if Germany is dictating terms and that is sure to rub its EU partners the wrong way. Moreover, the German finance minister is increasingly at odds with his own Chancellor, who also wants to save the Euro but does not want to broker a bailout under any circumstance. I should also mention that the junior coalition partner FDP party is dragging down the government in the most recent opinion polls, adding yet more tension in Germany’s ruling coalition.

What to do?  We shall find out this Thursday and Friday when the EU leaders finally get to the negotiating table to hash out a strategy. Will they decide to "put the loaded gun on the table" as the Greek Prime Minister insists?  With this much division, even within the German ranks, coming up with a solution may prove difficult. I suspect, the EU will do nothing except offer political support for the foreseeable future unless default is imminent.

As for Mr Schäuble, here are excerpts of what he had to say to the FAZ.

Mr. Minister, when must Greece be helped?

Greece did not ask for help. Therefore, the question is not currently relevant.

EU Commission President Jose Manuel Barroso has shown his confidence in still winning support from Chancellor Angela Merkel for an aid package for Greece at the forthcoming EU summit. Will he succeed in this?

We are united in the euro area: Greece cannot become a burden to the stability of the euro zone. Greece must show that it is taking all necessary efforts in this endeavour. The Greek Government has also repeatedly offered assurance that they will.

What did the European finance ministers decide last week then?

In the Eurogroup, we didn’t make a decision last week, but discussed what we will would do in a situation which we hope never comes to pass. If an insolvency were imminent, we would have something to do. The credibility of the euro would be damaged. Nobody can estimate the consequences of such a case.

What would be less severe: bilateral loans or loans from the EU Commission, which precede these to market to help Greece?

Germany would not participate in a loan from the EU Commission. This is not allowed in the [EU] treaty.

Isn’t the Nichtbeistandsklausel, the bail-out ban, circumvented with bilateral aid?

No, we have checked carefully.

So you’ve made the decision, only bilateral aid?

We made no decision at the last meeting of the euro finance ministers. But I ensured that there will be no euro bond. Through the rejection of one possibility, the other is not decided…

So, no decisions have been reached. Forget the conflicting stories you read every hour in the press.  No decision on a Greek bailout has been made yet. 

Later Schäuble gets to his views regarding a potential Greek default and what to do if this is imminent.

What’s worse, the insolvency of Greece or a transfer union ?

I have spoken with many who bore the burden of the decision in the case of the investment bank Lehman Brothers. Everyone has said to me: Do not test the effects of the insolvency of a euro area country.

Would the IMF not be the better aid donor, when we see that European flags are being burned in Athens?

One should not leave the dirty work for others. To maintain the stability of the euro, everyone must contribute.

Source

"Erst die Strafe, dann der Fonds" – FAZ

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.