August 24, 2012

Germany Doubles Down on Greece

Merkel said to insist on targets as officials study costs of Greek exit

Despite the fact that Prime Minister Antonis Samaras of Greece is trying to win more time for his country to comply with the budget constraints of its rescue package, German officials, including Chancellor Angela Merkel, seem to be backing away from earlier hints that leniency would be possible.

Chancellor Angela Merkel of Germany (Photo: AP)Not only is Merkel (left) expected to insist on strict adherence to the terms of the deal, but the country’s finance ministry is saying that a flexibility clause in the bailout is not legally binding while at the same time it is studying the costs of a potential Greek exit from the euro.

Reuters reported Friday that, after meeting with President Francois Hollande of France on Thursday, Merkel was expected to greet Samaras with inflexibility—despite Hollande’s stance that growth must be provided for as well as budgetary responsibility. While the two met in order to discuss presenting a united front to Greece, Merkel faces pressure at home to adhere to a tough stance, while Hollande was elected on a platform that favored measures to promote growth.

The two released statements of unity prior to a working dinner Thursday night, rather than calling a press conference afterwards; with Hollande’s repeated calls for growth rebutting Merkel’s insistence on austerity, their relationship is not the easy camaraderie that Merkel had with Hollande’s predecessor Nicolas Sarkozy.

However, German officials were not slow to voice their own determination for a hard line on Greece’s woes prior to Samaras’ “charm offensive” visits to Germany on Friday and France on Saturday. Finance Ministry spokesman Martin Kotthaus said that a clause in the Greek rescue agreement allowing more time for Greece to reach its reform targets in the case of a worse-than-expected recession was not legally binding.

The clause says that, should such a recession occur, negotiations with the so-called troika—the European Union, European Central Bank (ECB) and International Monetary Fund (IMF)—could be reopened. However, Kotthaus read the clause and then, according to the report, declared it "has no legally binding status." He gave no further explanation.

Other German officials have already aired their opinions that Greece must stick to its obligations and forget about asking for any leniency. Finance Minister Wolfgang Schaeuble dismissed Samaras’ insistence that Greece being granted more time did not mean that it would also require more money. Schaeuble said that Europe had already provided aid to Greece that had "gone to the limits of what is economically viable" and added, "More time is not a solution to the problems.”

Volker Kauder, parliamentary leader of Merkel's Christian Democrats, also dismissed Samaras’ plea. Kauder was quoted saying, "It has never been more true than in this situation that time means money, and we cannot make more money available. My position is that neither the time or the content can be renegotiated. Greece must meet its commitments first." He also, when asked if the joint currency could survive a departure by Greece, replied, "It would be no problem for the euro."

And in the meantime, a working group led by Germany’s deputy finance minister is calculating the costs of a potential Greek exit, even as Merkel insists that she wants the country to remain in the currency bloc. Deputy Finance Minister Thomas Steffen, also a member of the center-right Christian Democrats, is reportedly leading a group of approximately 10 officials from various departments of the finance ministry.

A Financial Times Deutschland report cited ministry sources in saying that the decision to set up the working group indicated a desire by Merkel and Schaeuble to be fully prepared for a possible "negative scenario." It quoted ministry sources as saying, "Colleagues are making calculations about the financial consequences [of a Greek exit] and are considering how a domino effect on other euro member states might be prevented."

According to a Bloomberg report, however, Merkel could lose one of her supporters in the quest for austerity. While the Netherlands has been a staunch backer of tough talk for Greece, it faces elections on September 12 that could see the tide turn away from cost-cutting measures and toward growth stimulus.

While caretaker Prime Minister Mark Rutte of the Netherlands has backed Merkel’s continued calls for budget cuts, the way the Dutch political system works, he may have trouble finding enough other parties to form a coalition after the election to continue in that vein.

Dutch support for such measures has waned and in fact the election was called in April after Geert Wilders, leader of the Freedom Party, withdrew his party’s support for tax increases and spending cuts.

Juergen Michels, chief euro-region economist at Citigroup in London, said in the report, “The September election outcome will be an important indicator of the willingness of one of Germany’s most important pro-austerity allies to continue to support eurozone rescue measures.” Rutte’s party “may struggle to find coalition partners who support their pro-austerity, pro-Europe program.”

Samaras was adamant about Greece needing more time, not money. After meeting with Merkel Friday, he was quoted saying, "Greece will stick to its commitments and fulfill its obligations. In fact this is already happening. I want to give three messages: First, we will bring results. Second, we are reducing two deficits at once: a fiscal deficit and a deficit in confidence in the country. Third, economic growth is of crucial importance is order to meet our obligations soon."

He reiterated, "We're not asking for more money. We're asking for breaths of air in this dive we are taking."

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.