The latest entry in John Redwood’s Diary discusses the German Chancellor’s dilemma over Greece
Mrs Merkel seems to be at war with herself. Euro Merkel knows she has to do what it takes to keep the Euro together, and to advance her European dream of a German led united Euro area – or EU as she would prefer. German Merkel knows that more and more of her fellow countrymen and women, and members of her own party, have lost patience with Greece and do not want a Euro more of Germany’s money to be lent, given or pledged to Greece.
Mrs Merkel also probably has enough self knowledge of both Germany’s considerable power in the EU, and the constraints on being seen to use that power too openly. Were Germany to lead a public ousting of Greece from the Euro, there would be bad press about brutal Germany cutting loose weaker countries because Germany had no sympathy with poorer countries nor any wish to share burdens and riches within the Eurozone. Were Germany to give ground and lead yet another bail out of Greece, but insist on austerity policies, there would be those who spoke and wrote about an authoritarian and dogmatic Germany forcing others to do as Germany instructed. Neither is a welcome thought capable of uniting a happy Eurozone.
So Mrs Merkel dithers. She tells us all where there is a will there is a way. If only Greece can behave better they might be accommodated. This is rather like saying if Greece had elected a CDU government there would not be a problem. At the same time she seeks to reassure her restive German friends and Parliament that this time there will be no easy terms bail out for a Greece which has failed to conform to past loan terms and to work properly through agreed programmes.
The tragedy for the Euro area is no-one around the table seems capable of leading the zone to a decision. That is why we have had weeks of damaging bad press for the zone, weeks of lending Greece more money from the ECB who assisted whilst the politicians delayed, and now two weeks of banks closed, no additional liquidity, and an air of great crisis. The ECB was made to carry the Euro from January and has now lent a total of Euro 89 billion to Greek banks, only to see them close and be unable to pay out people’s money when requested.
The preparatory work for Sunday’s meeting can run over once again all the old detail about what Greece might cut from its state budgets and which tax revenue it might be able to raise, but this is now looking very dated. The economic have deteriorated markedly thanks to the dithering of this year. Greece is starved of cash. Tax revenues have fallen. Output has suffered from the lack of confidence and now from the bank closures. Agreeing a modest three year loan and some changes to the state budget is not about to trigger a decent recovery and set Greece on the path to financial independence within the Eurozone. It might kick the can down the road one more time, only to create a bigger and more expensive problem some months later.
The first fix the assembled leaders need to arrange whether Greece leaves or stays within the zone is a fix for the banks. That will now be costly, given the damage inflicted on them. The banks may well need extra capital, as well as substantial additional liquidity. They remain the responsibility of the ECB and the wider Eurozone unless and until Greece leaves the Euro and has her own independent Central Bank. We are probably talking tens of billions here.
The second fix is for the Greek economy. Whilst I do not agree with all of Syriza’s policies, they are right to say the EU/IMF package has failed so far to get Greece growing, but growth has to be the priority. How do you get cash to flow and sensible new credit to be extended in a part of a currency zone that is as damaged and stressed by its single currency’s rules and massive German surplus?
The third and largest requirement is to fix the politics. The Euro bosses decided to take on the Greek government, aiming either to change their policies or to change the government. Instead the Greek people backed their government. What is the Euro area’s answer to a democratic government that simply does not accept Euro area rules? Lecturing them on their duties as borrowers has not worked. Either the Euro area has to have the full powers it needs to overrule a member state’s government, or it has to sit down and talk to whoever is elected and try to accommodate them. The last few weeks have seen a largely impotent Euroland clumsily interfering in Greek politics and losing. On Sunday they have to show they have learned from this bitter experience and can find a way to improve the position. If they decide they cannot lose face and lend Greece more, they need to help Greece organise an orderly transition to the drachma. That has to start with the ECB standing behind the Greek banks so they can open again.
Click here to read this piece in John Redwood’s Diary.