Germany to Greece: Drop Dead

Like New York City in the 1970s, the government in Athens today stands on the brink of defaulting. The numbers are sobering: Greece’s budget deficit tops 12% of GDP, and the government owes €20.5 billion ($27.8 billion) in debt service payments between now and the end of May 2010.[1] The Greek government under Prime Minister George Papandreou badly needs to restructure the debt in connection with its new, ambitious austerity program, which aims – desperately and implausibly – to bring the budget deficit down to 8.7% within the year. As with any mortgage holder seeking to refinance a loan, Greece would enjoy better terms if it could count on comfortably situated co-signatories. But thus far, Greece’s European partners have remained tight-lipped.

The response from Germany has been particularly self-righteous. Commentators depict the Greek crisis as the lamentable consequence of wasteful spending; exhibit “A” is the absurdly generous pensions system down in Hellas. The mood in Frankfurt has soured further in the face of revelations that earlier Greek governments conspired – with the help of Goldman Sachs – to hide the true fiscal situation from the European Central Bank. The verdict of Focus magazine was clear from the title story of February 22, 2010: “Fraudsters in the Euro-Family. Will Greece cost us our money?” This was accompanied by a crude image of Venus de Milo giving the finger to Europe.[2]

Germans are habitually sensitive about their currency, so fears about the stability of the Euro cannot help but alarm public figures north of the Alps. But financial coverage – even in the respectable Frankfurter Allgemeine Zeitung – has increasingly focused on the actions of speculators, as if the entire crisis were an artificial product of market manipulations by Anglo-Saxon bankers. Indicative of the mood is the following analysis by Holger Steltzner:

Behind the sensationalist “news” of an allegedly imminent bankruptcy, there is more than just a bet against Greece. Speculators have their eyes on Spain, Portugal, Italy and Britain. Their goal is to break apart the currency union and to cash in big on the collapse of the Euro and the pound.[3]

Undoubtedly there are speculators in the game with appetites on this scale. And the “credit default swap” market (i.e., bets on Greece defaulting) has grown to daunting proportions. Even so, lashing out against speculators is beside the point. The Euro needs to be tested. A debt crisis of Greece’s dimensions raises huge questions about the reliability of the Euro’s governing mechanisms. What the Euro is presently experiencing is a constitutional crisis that should, when resolved, provide investors and citizens with a clearer understanding of its real prospects.

For the time being, Angela Merkel’s Germany has pledged not to give “one cent” toward alleviating Greece’s plight.[4] Such responses have a long tradition in the Federal Republic, dating back to the heyday of the West German economic miracle. To most Germans, then and now, trade surpluses were evidence of hard work and thrift, while trade deficits were a sure sign of laziness and moral decay. Writing “blank checks” to support Europe’s weaker economies could only invert this moral order, punishing virtue and rewarding vice. Recognizing that a collapse of Italy or Britain – the weaklings of the 1970s – would bring disaster to all of Europe, Chancellor Helmut Schmidt searched for creative ways to assist these countries without putting German taxpayers directly at risk. (Typically, this involved promoting action by the Bundesbank or the IMF.)

Years later, during negotiations on European monetary union, Germans again insisted that there must be no blank checks. Each country within the Euro network was made responsible for adhering to a “stability and growth pact” limiting budget deficits to 3% of GDP. The Lisbon Treaty, now fully ratified, explicitly mandates that one member cannot be held responsible for another country’s debts. Consequently, Merkel’s government has ample grounds for denying any legal culpability for sovereign Greek debt, which was accumulated in flagrant violation of the “stability and growth pact.” In some readings, transfer payments from Germany to Greece would be unconstitutional.[5]

In keeping with this philosophy, European leaders have demanded that Papandreou solve the crisis on the backs of Greek workers (and pensioners) alone. Tactically, this approach has begun to pay off; for want of alternatives, Papandreou is poised to slash the Greek deficits, and he is theoretically committed to fulfilling the Maastricht criteria by the end of 2012. The absence of a European “bailout” for Greece may also help to avert a larger crisis this spring – by preserving moral hazard and encouraging the more significant problem cases, such as Spain and Ireland, to get their houses in order.

Whether Greece can overcome its deeper structural crisis is another matter. Corruption is a pervasive drag on the economy, and the ferocity of the strikes and demonstrations ripping across the country suggest a widespread unwillingness to accept that the day of reckoning is at hand. Papandreou’s austerity program will have a strong deflationary effect; this may improve Greece’s competitive position down the road, but it will hardly help to foster healthy growth over the next few years. Even with the best of intentions, Greece will remain handicapped by external pressure – exemplified by the unbalanced structure of Germany’s own economy. Though recently eclipsed by China as the world’s largest exporter, the Federal Republic is still guilty of producing massive imbalances within the EU. Surplus countries are not unalloyed blessings for their economic partners; they do not import enough from their neighbors, yet they still expect others to absorb their own excess production.

The Germans have made a clear macroeconomic choice in the past decade. By holding down wages and working until age 67, they have improved their competitive position significantly – thus allowing the retention of jobs. Germans have, in short, chosen to work; Greeks have chosen leisure. With short working hours, early retirement, and a bloated state sector, Greeks can only enjoy a high-consumption lifestyle thanks to the stability of the Euro. By keeping interest rates down, the European currency has enabled Mediterranean countries to import huge volumes of goods from Germany. Greeks are, in effect, enjoying time off that Germans have denied themselves.

This sounds massively unfair, but again: Germans do benefit from this arrangement, whether as industrial producers or as holders of debt (French, Swiss, and German banks together control the lion’s share of Greek sovereign debt). And Germans show little inclination to redress the intra-European imbalances by stimulating their own consumption and paring back their oversized export sector. As a result, the odds of overcoming the fundamental North-South divide in Europe are dismal – about as dismal as the odds of Italy ever smoothing out its internal North-South imbalances.

For the Euro to make any sense, it must be coupled with a willingness to treat the Euro zone as a fully integrated economic area with regions of higher and lower productivity. At present, German public opinion is balking at this perspective; many would, if anything, prefer a return of the old, trusted Deutschmark within comfortable national boundaries. Expelling Greece from the Euro would be a less radical move, yet such a punitive act would set up a chain reaction in which the other “PIIGS” (Portugal, Ireland, Italy, Spain) flew out of the Euro as well. Given the historical pattern of European integration, in which advances toward tighter unity emerge in response to community crises, a more constructive solution would involve substantial European coordination of national budgets and an ongoing “bailout” of the Mediterranean periphery. This will smack of Euro-imperialism to many Greeks, but a more accurate description would be co-dependency.

If European leaders, finance ministers, and central bankers cannot plausibly demonstrate a commitment to a single economic area, speculators may indeed bring down the Euro crashing down. So far, the effects of this winter’s crisis have been mild – a downward correction in the currency’s value that was needed anyway. But the Germans’ evident unwillingness to accept the full implications of the currency union must surely plant a seed of doubt in the minds anyone holding large quantities of Euros. Failure by Germany to signal an appropriate, and self-evident, degree of solidarity for their fellow Europeans in Greece could well throw the whole basis of the common currency into question.

This is why the prospect of IMF assistance to Greece is viewed warily by officials in Europe. In recent months, IMF stabilization packages have helped Hungary and Latvia tiptoe back from the brink. But those two countries were not members of the currency union. If the Europeans have to rely upon the IMF to sort out the problems in Greece, they will be abdicating responsibility and, in effect, demonstrating the insubstantial political basis of the common currency. One can only hope that Germans will come to take a broader view of the existing interrelationships between center and periphery in Europe. Back in 1975, President Gerald Ford endorsed federal support for New York City’s financial recovery – just weeks after telling the City, in effect, to “drop dead.”

[1] “Kultur des Trickens,” Der Spiegel Nr. 10 (March 8, 2010), 67.

[2] “Betrüger in der Euro-Familie,” Focus Nr. 8 (Feb. 22, 2010).

[3] Holger Steltzner, “Griechen oder Mark,” posted March 6, 2010 on

[4] Economics Minister Rainer Brüderle quoted in Nicholas Kulish, “Merkel Makes No Financial Pledge to Greece,” NYT, March 6, 2010.

[5] Joachim Jahn, “Europäische Verträge verbieten einen ‘Bail Out,’” posted Feb. 10, 2010 on