[D66] Greek crisis triggers fierce conflicts inside Europe

[Antid Oto]

Greek crisis triggers fierce conflicts inside Europe
By Peter Schwarz
11 May 2011

Rumours about the possible withdrawal of Greece from the euro, and a secret
meeting of European finance ministers, have triggered fierce conflicts within
the European Union.

Spiegel Online reported on Friday that Greece was considering leaving the euro
zone and reintroducing the drachma as its national currency. Finance ministers
from the largest euro countries met in Luxembourg with euro group chief
Jean-Claude Juncker, European Central Bank (ECB) President Jean-Claude Trichet,
and EU Commissioner Olli Rehn.

The news sparked turmoil on the financial markets. The euro fell considerably
against the dollar. Jean-Claude Juncker at first denied there had been a
meeting, even though he had issued the invitations. Greek Prime Minister Giorgos
Papandreou denied there were plans to leave the euro, saying angrily, "Such
scenarios border on the criminal." Other governments and the ECB also denied the
existence of such exit plans. "No euro-zone member wants to abandon the euro,"
said ECB executive officer Erkki Liikanen.

Nevertheless, speculation about the possible consequences of a Greek withdrawal
from the euro zone is mounting. Economists, politicians and journalists are
avidly discussing the pros and cons of such a move.

The tone of discussions between the capital cities is becoming more and more
heated. According to Spiegel, Berlin is accused of deliberately spreading
confidential information. “In Germany, there are people who are deliberately
spreading rumours and half truths”, said one critic cited by the Süddeutsche
Zeitung. "They are either acting irresponsibly or pursuing their own agenda."

The newspaper cited another high-ranking representative of the euro countries
saying that Berlin was throwing "Greece and the euro into the jaws of the
speculators."

A year ago, the European Union and the International Monetary Fund agreed to a
110 billion-euro rescue package for Greece, demanding that the Greek government
implement drastic austerity measures. It is now obvious that Greece—despite, or
rather because of, this programme—is slipping deeper into debt.

The Papandreou government has pushed through drastic cuts in public spending;
wages in the public sector have declined by 30 per cent. But the austerity
measures have in turn unleashed a recession, which is eating up all the savings.
According to the Ministry of Finance, in the first four months of this year
government revenues were €15.1 billion, €1.3 billion less than the amount needed
to meet the requirements of EU and the IMF.

Last year, economic output fell by 4.5 percent and total debt increased to 142
percent of gross domestic product (GDP). There have been 65,000 bankruptcies,
and more than 200,000 people have lost their jobs. In Athens, one in five shops
now stands empty. In the countryside, the situation is even worse.

All figures suggest that the recession has deepened. The number of building
permits issued in January was 62 per cent lower than in the same month last
year. The sale of new cars fell by half in the first four months compared to the
same period last year.

The EU and IMF plan anticipated that Greece's borrowing needs until 2013 would
be covered by the €110 billion bailout. Thereafter, it should be able to
gradually raise funds on the capital market by issuing government bonds. But
half of the rescue fund has already been used up and the remaining €55 billion
will probably last only until the spring of 2012. At the same time, the
financial markets refuse to lend to Greece. The rating agencies have downgraded
the country so low that it must pay 25 per cent interest for two-year bonds—an
unsustainable situation.

If nothing happens, Greece must declare state bankruptcy next spring. This would
result in significant costs falling on other European governments.

The bailout means that a growing portion of Greek government debt is not held by
private banks but by public institutions. In 2009, private creditors held 100
per cent of Greek public debt, whereas now 37 per cent is in the hands of the
EU, IMF and ECB. "The burden has shifted massively from private to public
hands", said Unicredit banker Andreas Rees.

The public share of the debt is expected to rise to 50 per cent by 2013. Private
investors will probably then only hold €180 billion of Greek debt, compared to
just under €300 billion in 2009. The recovery programme for Greece has turned
out to be a rescue programme for the private banks.

The threat of Greek state bankruptcy has led to fierce conflicts within the EU.
Especially in Germany, there are increasing calls for debt rescheduling or for
Greece to be expelled from the euro zone.

In several recent interviews, the head of the Ifo Institute Hans-Werner Sinn
called for Greece to return to the national currency. “Any attempt to stabilize
Greece and keep it in the euro zone would be a bottomless pit. If Greece is left
inside, it would destabilize the euro,” he said. The return to the drachma would
enable Greece to devalue its currency and become competitive again.

Max Otte, professor of economics at the University of Applied Sciences in Worms,
argues in a similar fashion. "Leaving the euro would help Greece to establish
its competitiveness again through external devaluation. Over time, the country
could rehabilitate itself without this being seen as the result of dictates from
abroad," he wrote to finance daily Handelsblatt.

The finance expert of the Free Democratic Party (FDP) parliamentary group, Frank
Schäffler, called for "positive support for Greece's withdrawal from the
euro-zone, as it is clear the Greek bailout and savings measures are
accelerating the crisis."

However, other experts warn of the explosive consequences of such a move:
massive price increases for energy and other imports, a run on the Greek banks
and a massive capital flight. And public and private debts would probably still
be denominated in euros. "[Debt] servicing would become impossible and the Greek
state would immediately become bankrupt", wrote Gustav Horn, director of the
Institute for Macro Economics and Crisis Research (IMK).

This would also bankrupt the Greek banks and pension funds, which have loaned
the Greek state €75 billion. The export sector would see little benefit from
devaluation, as exports contribute only 7 percent of GDP in this industrially
weak country.

In other words, the introduction of the drachma would result in state bankruptcy
and massive inflation. It would decimate the living conditions of broad layers
of the population, as happened under hyper-inflation in Germany in the 1923.

Government representatives warn that a Greek exit from the euro zone would pull
Ireland, Portugal and Spain into a maelstrom, and bring about the end of the
euro. "We don't want the euro area to explode for no reason", commented euro
group leader Jean-Claude Junker.

Nonetheless, a small but influential minority in Germany is insisting that
Greece be forced out of the euro zone. The call for Greek debt rescheduling
finds broader support. Berlin does not openly advocate this step, however,
fearing a violent reaction by the financial markets that could overwhelm
Ireland, Portugal and Spain.

There are sharp conflicts regarding this issue with other countries, whose banks
and governments have underwritten far higher loans to Greece. In contrast to
previous rescue measures, which had merely extended credits to Greece, billions
would be lost forever in the event of debt rescheduling.

The German banks have clearly come to the conclusion that they could deal with
debt rescheduling in which Greece wrote off up to 50 percent of its debts. For
France and other countries, such a restructuring would be far more difficult to
bear. For the Greek population, it would be bound up with further cuts and
attacks on living standards - as is the current rescue package.

According to Spiegel Online, a 50 percent debt write-off would cost the German
banks, the federal government and Bundesbank (Federal Bank) a total of €27
billion. But only €9 billion would fall on private banks, of which the lion's
share is held by Hypo Real Estate, which is state owned.

This amount is relatively high. But compared with the costs of German
unification, which have amounted to well over one trillion euros in the past
twenty years, it is quite modest. Germany's annual trade surplus of €200 billion
is a multiple of that amount. In addition, the longer a debt rescheduling is
postponed, the more expensive it becomes for Germany.

Some commentators have come to the conclusion that the essential problem in the
Greek crisis is not financial but political. The pressure of the international
financial crisis is bringing national interests increasingly to the fore in Europe.

Columnist Wolfgang Münchau writes in the Financial Times: "The core issue in the
euro-zone crisis is not the overall size of the peripheral countries' sovereign
debt. This is tiny relative to the monetary union's gross domestic product. The
area's total debt-to-GDP ratio is lower than that of the UK, US or Japan. From a
macroeconomic point of view, this is a storm in a teacup. The problem is that
the euro zone is politically incapable of handling a crisis that is now
contagious and has the potential to cause huge collateral damage.”

Former German Chancellor Helmut Schmidt argues along similar lines in Die Zeit.
The alleged crisis of the euro was “much more a crisis of the ability to act of
the EU as a whole,” he writes. "There is neither a common economic or finance
policy, nor a common foreign and security policy (look at Libya!) nor a common
energy policy."

According to recent agency reports, the EU is now preparing to increase the size
of the rescue pact for Greece by €30 to 60 billion, linking this to further cuts
targets for the Greek government. However, this will only postpone the problem
and intensify the crisis rather than resolve it.

http://wsws.org/articles/2011/may2011/gree-m11.shtml