The wrong battle

Illustration in linocut by Manos Symeonakis

“There is no Greek-German war,” government spokesman Giorgos Petalotis said last week. “Greece and Germany are not on collision course,” said Foreign Minister Dimitris Droutsas. All these statements can only mean one thing: Greece and Germany are very much at loggerheads. But their dispute is not just a bilateral squabble; at its heart it’s about divergent views on how to respond to the crisis threatening the euro and, beyond that, on the very purpose of the European Union.

The frantic attempts by the government to play down any rift between Athens and Berlin came after Greek Prime Minister George Papandreou decided on November 15 to dust himself off, stand on the ruins of the Greek economy and hit back at German Chancellor Angela Merkel with a rebellious passion. Speaking in Paris, Papandreou accused Merkel of driving up bond yields for weaker eurozone members by insisting that private investors should foot part of the bill for a permanent mechanism to support countries with failing economies, like Greece’s. “This could create a self-fulfilling prophecy,” said Papandreou. “This could break backs, this could force some economies into bankruptcy.”

On the face of it, there seems little wrong with Merkel’s insistence that private bondholders should accept losses, or a “haircut,” on their investment as part of a debt crisis mechanism to be adopted by 2013. Most Europeans would accept that this would create a fairer system although, clearly, German taxpayers would benefit the most as they’re the ones who would be called on more often to bail out failing eurozone members. But the self-serving element to Merkel’s position is not what should be of most concern to Europeans. Instead, it’s the way Berlin has tried to steamroller other EU countries into accepting the inclusion of the “haircut” clause ahead of a decisive EU leaders summit in Brussels next month. It’s this lack of consultation and the absence of consideration for struggling eurozone members that is undermining the Union.

Papandreou argued that making such a big fuss about investors having to pay their share simply gave jumpy bondholders a seriously aggravated case of the jitters, pushing up the yields on government bonds for Ireland, Portugal and Spain to dangerous levels. Few EU leaders backed Papandreou openly but there is great concern about Germany’s stubbornness. “When the history of the eurozone is written, last month’s German-driven EU summit agreement to devise a crisis resolution mechanism for countries to service their debts may well be cited as the event that pushed Ireland over a cliff,” Bloxham, Ireland’s oldest stocbrockers, said last week, a few days before Dublin turned to the EU and the International Monetary Fund for emergency loans.

In Germany, though, there is a different view. “If Merkel were to abandon her plans, then it would be paradise for investors and weak governments,” wrote the Suddeutsche Zeitung newspaper last week. “The speculators could charge higher interests on Irish or Greek bonds without any risk of losses. And the Greeks could continue with their record indebtedness because they would have no more pressure from the financial markets and in an emergency would be rescued by their euro partners.” However, this ignores that when Greece tries to go back to the international bond markets in 2013, its borrowing costs will be pushed up anyway, as investors will be wary of having to take a haircut should Athens have to revert to the permanent EU mechanism for further loans.

The Greco-German dispute is symptomatic of the differing views emerging within the EU about how to combat the debt crisis. There is a tendency for the EU to speak with two voices and to pull in two different directions. “The euro, which was supposed to make European integration irreversible, could become its undertaker,” wrote the Frankfurter Allgemeine Zeitung daily last week. Every day the debt crisis gnaws away at the EU’s confidence, making the Union seem an exhausted shadow of its former sprightly self. This dissipation of energy and will is leading to division and, whether through bad luck or design, Merkel is at the forefront of creating ever-deeper rifts.

Speaking at a rally of her Christian Democratic Union (CDU) in Karlsruhe on November 15, the same day that Papandreou challenged her scheme for private investors, Merkel said her predecessor as chancellor, Social Democrat Gerhard Schroeder and his Finance Minister Hans Eichel had blundered when they allowed Greece to join the eurozone. “In 2000, Schroeder and Eichel couldn’t let Greece join the euro fast enough and they ignored all the warnings,” she said. “It was a political decision… political decisions are important but those which ignore the facts are irresponsible.”

It’s now obvious that Greece was not ready in 2000 to stick to the single currency’s fiscal guidelines, as prescribed by Germany. It’s also clear that allowing Greece into the eurozone was a political decision — one aimed at giving the nascent single currency numerical, if not necessarily economic strength, but also the opportunity to encourage economic reform and German-style efficiency in a sluggish European state. A decade ago, it was a convenient political decision for Germany — Greece, after all, became another market in the eurozone for its exports — but now it’s a terrible inconvenience for Berlin. But that’s the thing about political decisions: You take a risk. Sometimes you ignore the facts because you have a conviction that something greater is at stake, even if the numbers don’t back you up.

Merkel might consider, for instance, that the Marshall Plan, which ensured Germany’s post-war reconstruction and helped it become the economic powerhouse it is today, was a political decision. The United States, which led the effort, could have decided that paying to help rebuild Germany did not make economic sense but Washington chose to look at the bigger picture — the opportunity to fight “hunger, poverty, desperation and chaos” as US Secretary of State George C. Marshall said when he unveiled his plan in June 1947. Using words that are eerily relevant to today’s Europe, Marshall said: “The United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace.” Peace in Europe is not under threat in 2010 but the EU’s faltering economic health is putting its unity at risk.

While leaders argue over bond yields, haircuts, bailouts, deficit and debt, one very important factor is being overlooked. As was the case in the Europe of 1947 before the Marshall Plan, it’s the people that are suffering. They are the ones that pay the cost of failed economic policies and soaring bond yields — people who have fulfilled the wishes of politicians and bankers by mortgaging their futures to buy houses and cars and who believed the euro would bring the permanent stability they were promised. This is why unity must be restored.

Somewhere between Papandreou’s rebelliousness and Merkel’s intransigence, we’ve forgotten that the EU and its institutions were created to improve people’s lives. Many of these people are now losing their jobs, homes and hope. That’s why, even though Greece and Germany may not be at war, their dispute is confirmation that Europe is fighting battle, but the wrong one.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on November 26, 2010.