German finance minister’s vision at risk

Posted on July 23, 2013

Wolfgang Schauble talks with journalists as he arrives for a Eurogroup meeting in Luxembourg©AP

Wolfgang Schäuble, Germany’s finance minister

Spare a thought for Wolfgang Schäuble, Germany’s 70-year-old finance minister. A politician of unparalleled experience in Angela Merkel’s centre-right government, he carries the flag for those who hold that the eurozone’s travails will be, in the long run, an opportunity to advance European integration.

Yet two government crises in the space of a month, the first in Greece and the second in Portugal, underline how his vision risks being buried under mountains of unrepaid southern European debt. Bruised and battered, the ruling coalitions in Athens and Lisbon limp on, scarcely more confident than the societies they govern that obedience to German-inspired policy prescriptions will save their countries.

    When Mr Schäuble visited Athens last week, the leftist Greek newspaper Avgi welcomed him with the abrasive headline: “Hail Schäuble! We who are about to die salute you.”

    Behind the scorn and despair of this rhetorical flourish lies the smouldering conviction of millions of Greeks that, although their own rulers bear the original responsibility for six years of economic recession and mass unemployment, Germany has made matters worse.

    Ahead of Mr Schäuble’s trip, Greek legislators dispatched for trial, on allegations of abuse of office, a man familiar to him from hours of late-night sessions at the eurozone bargaining table. As finance minister in Athens from 2009 to 2011, George Papaconstantinou clung to the view that constructive relations with Germany were a sine qua non of Greece’s effort at self-correction.

    Parliament followed up its punitive measure by reluctantly passing legislation, supported by Germany, that sets the stage for the dismissal of thousands of state employees in return for more drip-fed financial support from Greece’s international creditors. In protest, Greek trade unions held a general strike.

    Aware of the acrid political atmosphere in Athens, Mr Schäuble came bearing gifts: €100m in state-backed loans for small and medium-sized Greek businesses. But what Greece really needs, to kindle a flame of hope in its future, is another restructuring of its foreign debt.

    Conventional wisdom holds that it would be suicidal for Mr Schäuble, or any German politician, to speak this unpalatable truth to voters before Germany’s September 22 national election. Unlike the Greek debt haircut of March 2012, which clipped private sector lenders, any future restructuring would shear the locks of official creditors, including Germany, which now hold over 90 per cent of Greece’s debt.

    This would represent a revolution in the eurozone crisis. So far, the bailouts of Greece, Ireland, Portugal, the Spanish financial sector and Cyprus have cost German taxpayers much in loans and guarantees, but not one cent in hard, unrecoverable cash. Indeed, the €110bn EU-International Monetary Fund rescue of Greece in May 2010 was as much about protecting German banks, which had lent recklessly across southern Europe, as it was about restoring Greece’s financial health.

    Yet in their bones and wallets, German voters already sense that some of the billions of euros lavished on Greece since 2010 will probably never be repaid. To that extent, a second Greek debt restructuring would not shock German taxpayers and destabilise the political scene, although legal hurdles might need to be jumped at the nation’s constitutional court.

    More dangerous, for its impact on German political and public opinion, would be the dropping of a different penny: the growing possibility that debt write-offs, or extra financial aid, will have to be made available not just to Greece but to Portugal and Cyprus. Spain’s banks are not wholly out of the woods, either.

    The Portuguese case is especially relevant because, next to Ireland, no country has striven more earnestly to obey the rules for recovery laid down by Germany and other creditors. Yet the medicine, insofar as it is working at all, is not working fast enough to assure Portugal’s scheduled return next year to international debt markets. As for Cyprus, the duration and intensity of its economic and social collapse are unmeasurable.

    The question, then, that threatens to dominate German public debate is: “Greece, Portugal, Cyprus . . . Where will we Germans draw the line?” The only certainty is that no answer will come before September 22.

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