Does the crisis over Greece and the euro mean that the European Union (EU) member states should be brought under central “economic governance”? Yes, say the European institutions and France. No, says Germany, the EU's paymaster who refuses to keep paying the expenses of others.
The creation of a central “European economic government” is one of the pet projects of French President Sarkozy. On Friday Yves Leterme, the Prime Minister of Belgium, proposed a common Eurozone finance ministry and the creation of a European Debt Agency. “The EDA would take over the existing debt instruments and issue new ones,” he said. Belgium is often used as a spokesperson by France, one of the EU's heavyweights, when Paris wants to launch new ideas.
Chancellor Merkel, however, is reluctant to “integrate” Germany's economic policies under centralized EU governance. For many Germans the lesson from the current euro crisis is that it was wrong to give up Germany's monetary instruments and exchange the Deutsche Mark for a common currency with countries such as Greece, Portugal and Spain. Contrary to Messrs. Barroso, Sarkozy, Van Rompuy and Leterme, the Germans do not see the Greek crisis as an argument for more European economic centralization, but rather the opposite.
Chancellor Merkel is confronted with a public opinion that is unwilling to pay the debts of other countries out of “solidarity.” The Germans are exasperated with the Greeks. When Greece joined the eurozone in 1999, it had to promise to adhere to the EU's budget rules. It failed to do so, but covered this up, falsifying the official figures which it submitted to the EU. A recent re-examination of the Greek budget reports shows that Athens has not met the standards in any year except 2006.
Last Thursday, Greece managed to borrow â¬5 billion from investors. This was done in ten-year bonds against a high interest of 6.4 percent. The bond issue was oversubscribed, indicating that the markets reacted positively to the Greek austerity plan presented earlier last week. The danger, however, of a bankruptcy of the Greek state, which risks dragging down the euro, the currency which Greece shares with 15 other EU member states - the so-called eurozone - has not been averted. The euro's problems are far from over.
Greece needs another â¬15 billion to pay the interest on its government debts. Owing to its dire financial situation, Athens has to pay an interest on the bonds which is twice the rate on comparable German bonds. The high interest neutralizes a substantial part of the â¬4.8 billion which the austerity plan of the Greek government is expected to generate. The plan, which includes raising taxes, cutting civil servants' wages and extending the legal retirement age from 61 to 63, is to reduce this year's Greek budget deficit from 12.7 to 8.7 percent of GDP.
The plan was well received in the European capitals and by the European Commission and European Central Bank (ECB), but still has to take the domestic political hurdles. Demonstrations by Greek trade union members against the plan have already led to riots. More unrest is expected.
After the announcement of the austerity measures, George Papandreou, the socialist Prime Minister of Greece, said on Greek television: “We are now justifiably expecting EU solidarity. We've done whatever we need to. Europe must do the same.”
On Saturday, French President Nicolas Sarkozy said that France will support Greece. “We cannot let a country fall that is in the eurozone or else there will be no more euro,” he said. This was good news for Papandreou, who was in France over the weekend.
Papandreou's visit to Berlin last week was less successful. It coincided with demands from leading parliamentarians from both parties in Chancellor Angela Merkel's coalition - her own Christian Democrat Party and the Liberal Party - that Greece sell some of its uninhabited islands or national treasures if it needs money. “We give you cash, you give us Corfu,” the tabloid Bild, Germany's largest paper, commented, adding: “Sell your islands, you bankrupt Greeks! And the Acropolis too!”
Papandreou rejected the suggestion. “We cherish these islands, and selling them would be out of the question,” he told The Financial Times.
The cover of a recent issue of the German weekly Focus indicates the mood in Germany. It headlined “Cheats in the euro family” and showed an ancient Greek statue making a gesture of disrespect towards the readers. The cover caused a diplomatic row. The Greek authorities summoned the German Ambassador to Athens to complain about the German press reports.
The Germans are angry because they are being called upon to bail out the Greeks, who, although they cannot afford it, have a welfare system which is more generous than Germany's, whilst during the past years the Germans have been subjected by their government to severe austerity programs, including an unpopular labor market reform called Hartz IV.
“The Greeks take to the streets to protest against the increase of the pension age from 61 to 63. Does that mean that the Germans must extend the working age from 67 to 69, so that the Greeks can enjoy their retirement?” the influential Frankfurter Allgemeine Zeitung asked in an angry editorial. A deputy parliamentary leader of Merkel's Christian-Democrat Party said: “I can't explain to a Hartz IV recipient that he is not getting another cent but a Greek gets to retire at 63.”
The mood in other countries that have already tidied up their own economies with austerity policies is similar. Last Thursday, the Dutch Finance minister told the Dutch Parliament: “I cannot repeat it often enough: we will never intervene to help Greece. We insist that Greece solves its problems entirely on its own. Greece has been living beyond its means for years and years.”
In 1999 the Dutch, like the Germans, were reluctant to give up their own currency for the euro, fearing that the irresponsible behavior of foreign governments might drag their currency down. Their worst fears now seem to have materialized.
Countries that have not taken similar austerity measures to comply with the EU's budget rules, however, seem less opposed to “solidarity” with the Greeks.
European institutions also advocate “solidarity.” Jean-Claude Trichet, a Frenchman who is the president of the European Central Bank, declared that he favors a European plan to help Greece in order to avoid IMF involvement. The Greek Finance Minister had warned that Athens cannot rule out turning to the IMF if help is not forthcoming from the other eurozone countries. European Commission President Jose Manuel Barroso has also said that Greece can count on European solidarity.
EU institutions are using the Greek crisis to push for further economic integration and greater EU oversight over the economic policies of the member states. Mr. Barroso has vowed to make full use of new powers under the Lisbon treaty to push for greater “economic governance in the union.” He denies that the Greek crisis weakens the case for further economic integration. “It does the reverse,” he said. EU President Herman Van Rompuy has also cited the crisis as a reason for greater “economic governance” within the EU.
Instead of arguing for more economic “integration” (read centralization), leading German economists, such as Hans-Werner Sinn, the head of the IFO, the Institute for Economic Research at the University of Munich, advocate the expulsion of Greece from the eurozone.
Most Germans agree, which makes it as politically impossible for Chancellor Merkel to bail out Greece as it is for Mr. Papandreou to sell Corfu or the Acropolis to Germany