German Finance Minister Wants Greece Out Of Euro

Frances Coppola Contributor
http://www.forbes.com/sites/francescoppola/2015/07/11/german-finance-minister-wants-greece-out/

After a bruising few days, the Greek government has come up with a new proposal. Helped by the French, who appear to have decided that under no circumstances should Greece be forced out of the Euro, they have produced a detailed document that includes commitments to reform of pensions and taxation. The distinction between this and the European Commission’s unofficial proposal of June 26th is vanishingly small: longer timeframes for elimination of the EKAS supplementary pension and ending of VAT subsidies for the islands makes this proposal a little less like a cliff edge, but as far as I can see that’s about the only difference. Faced with a stark choice between crossing its “red lines” or being forced out of the Euro, the Greek government has caved in.

Initial responses to the new proposal were positive. The IMF , ECB and European Commission said the proposal was a good basis for talks. The “Euro working group” that initially examined the proposal gave the green light for it to go to the Eurogroup for consideration. For a moment, it looked as if the Greek government’s capitulation, together with its newly humble attitude (helped by a change of personnel in the finance ministry), would enable the Eurozone creditors not only to agree a new bailout program but also, perhaps, to offer debt relief.

The Greek government’s proposal, far from ending austerity, actually increases it (though over a longer time frame than the creditors wanted). So debt relief has now become the principal aim of the Greek government. In his speech to the Greek Parliament, the Greek Finance Minister Euclid Tsakalotos described various forms of debt restructuring that he said would now be agreed, including a swap of ECB-held bonds for ESM bonds that was originally proposed six months ago by Yanis Varoufakis. Mr. Tsakalotos’s conviction that debt relief would be offered in return for the new, tough proposal undoubtedly helped to persuade the Greek Parliament to vote for the proposal, which was duly passed with only 17 votes against. But several members of Syriza either abstained or voted against it, including a couple of ministers: the proposal only passed with the support of opposition parties. A reshuffle of the Greek government now seems likely.

In switching from ending austerity to obtaining debt relief the Greek government does seem now to be pushing at a half-open door. There is strong international support for debt relief: the IMF, the US, France and Italy have all said that debt relief is necessary. And there is a sense that capitulation cannot be entirely on the Greek side. Donald Tusk, president of the European Council commented that “a credible proposal from Greece must be matched by a credible proposal from the creditors”. The Greeks have offered austerity. The creditors must now offer debt relief.

To be sure, debt relief does not necessarily mean a face value write-down. It might mean extension of maturities and interest amnesties that would mean Greece could effectively ignore its debt for many years to come, perhaps only commencing repayments when growth is restored. This certainly seems to be what the IMF had in mind in its Debt Sustainability Analysis:

Given the fragile debt dynamics, further concessions are necessary to restore debt sustainability. As an illustration, one option for recovering sustainability would be to extend the grace period to 20 years and the amortization period to 40 years on existing EU loans and to provide new official sector loans to cover financing needs falling due on similar terms at least through 2018…..In this scenario, while the November 2012 debt/GDP targets would not be achievable, the gross financing needs would average 10 percent of GDP during 2015-2045, the level targeted at the time of the last review.

But hardline finance ministers are having none of it. Slovakia’s Peter Kazimir, Austria’s Hans-Joerg Schelling and Germany’s Wolfgang Schaeuble all rejected debt relief outright. Herr Schaueble even said that debt relief could break the “no bailout” requirement in EU treaty legislation.

I find this extraordinary. A bailout is the granting of loans, not the subsequent restructuring of those loans. The no-bailout clause was breached in 2010, 2011 and again in 2012 for Greece, not only through lending by the EFSF but also through bilateral loans, the largest of which came from Germany. When the European banking system was at risk, the no-bailout clause was an inconvenience that could quietly be ignored. But now the banks are believed to be secure, the no-bailout clause can apparently be invoked with impunity to deny debt relief that everyone knows is not only needed by Greece but also by the rest of the Eurozone. Without it, the creditors stand to lose their shirts. I fail to understand why 100% loss through default and disorderly Grexit is better than an agreed restructuring that may mean no loss at all, just a very long wait. But that’s Eurozone politics for you.

But it’s not just debt relief that the hardliners want to reject. It is the whole proposal. The fatal flaw in the Franco-Grecian plan is that there is no agreed benchmark for a “good enough” proposal. So hardliners who really want Grexit can refuse to accept not only this proposal but any other on the grounds of inadequacy. Nothing the Greek government proposes is ever going to be good enough for those who are determined to see Greece leave the Eurozone. Unless clear criteria can be established for acceptance of the Greek proposals, the hardliners can simply drive Greece out of the Euro through a process of attrition.

Even if by some miracle the proposal is accepted, unless someone can persuade hardliners of the need for debt relief, it will be short-lived. Without debt relief – ideally coupled with inward investment, perhaps through President Juncker’s investment plan, and monetary easing via QE – such harsh austerity is not compatible with continued Euro membership.

The acknowledged leader of the “Greece Out” faction is Germany’s influential Finance Minister, Wolfgang Schaueble. He makes no secret of his preference for Greece to leave the Euro. Indeed he has wanted Greece out since 2011. For Herr Schaueble, Grexit is the only solution.

And it looks as if he intends to make sure it happens. Prior to the Eurogroup meeting, Herr Schaueble made the following points (my paraphrase):

-          Greece’s new proposal is nowhere near good enough for a third bailout

-          Even if we reach agreement on actions, we don’t trust the Greeks to implement them

-          Decision about Greece’s future must be made this weekend

This adds up to “I will discuss, but don’t expect me to change my position”. The only decision Herr Schaueble wants to see this weekend is a decision for Greece to leave the Euro.

As I write, news from the Eurogroup meeting is that Herr Schaeuble is proposing a temporary exitof Greece from the Euro. Temporary things have a habit of becoming permanent: after all, if Greece has to create a completely new currency, and the new currency gives it the devaluation it desperately needs and enables it to recover, why would it want to return to the Euro straitjacket? And if it doesn’t, why would anyone let it back in? This is not remotely credible. Herr Schaeuble’s call should be seen for what it is – an open statement that he wants Greece out of the Euro and will consider nothing else.

Unless someone – perhaps Chancellor Merkel? – overrules Herr Schaeuble, I fear he will carry the day because of support from the other hardliners. All the hard work by Greece and its allies will go for nothing. Greece is being given a sharp push down the slippery slope to Grexit.