The last thing Germany is going to do is cut a deal with Greece
By Jeremy Warner
7:00PM GMT 05 Feb 2015
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The economic case for further Greek debt forbearance is pretty much unarguable. Photo:Bloomberg
One of the curiosities of financial markets is that when confronted with the possibly catastrophic consequences of unfolding events, they tend to assume rational, least-damage outcomes, a mind-set they stick to right up to the moment they’re proved wrong.
One of the curiosities of financial markets is that when confronted with the possibly catastrophic consequences of unfolding events, they tend to assume rational, least-damage outcomes, a mind-set they stick to right up to the moment they’re proved wrong.
Perhaps the most famous example was in the run up to the First World War: even after the assassination of Archduke Ferdinand, markets remained in a state of blissful unconcern, notwithstanding the ever more deafening sound of sabre rattling. Nobody could surely be so stupid as to go to war. But they were, and as the borders closed, the world succumbed to one of the worst financial crises in modern history.
By now you will have guessed where this is heading. I was at a presentation in the City the other day, listening to some leading bond market strategists giving their thoughts on the outlook for interest rates. Naturally, they were asked about Greece. The prevailing view was that some kind of compromise would be cobbled together, one that would allow both sides to claim victory and prevent a messy Greek exit from the euro. “There is common, rational ground between Berlin and Athens in terms of flexibility around the size of the primary surplus and the interest rate Greece is charged on its debts,” one of the strategists said.
Really? What perhaps ought to be the case is, in practice, a very long way from it. The first cracks in this oddly sanguine view of a fast deteriorating situation appeared on Wednesday night, when the European Central Bank said it would refuse to take Greek collateral.
Why markets had assumed a different result is a bit of a mystery; it was always inevitable that the ECB would stop providing support if the terms of the bailout were breached. In all currency zones, central bank “lender of last resort” facilities are conditional on solvency, and in no universe could Greece be regarded as solvent.
But no matter. There was a brief bout of nerves following this “bombshell”, but markets soon recovered their poise. One way or another, they have convinced themselves that it will be fine in the end. Well here are the three key political reasons why Berlin is most unlikely to compromise in any meaningful sense, even though cutting Greece slack bears zero economic cost and arguably avoids a major European implosion.
First, compromise might have serious political repercussions in Germany itself. Throughout Europe’s economic crisis, Germany has been a beacon of broadly sensible, centrist, political stability, apparently immune to the populist movements which are overwhelming others.
Germans are natural disciplinarians, and they don’t take kindly to the idea of bailing out those who flout the rules, however oppressive. If Wolfgang Schäuble, Germany’s hard line finance minister, needed further convincing, he only had to look at Bild-Zeitung, the German equivalent of Britain’s Sun, in which a poll suggested that 68 per cent of Germans were against any further concessions.
To compromise with Syriza would be to give succour to Germany’s own populist upstarts, not least Alternative für Deutschland, a party which has rocketed in the polls since taking on an overtly Islamophobic message. Given relatively recent historical experience, the last thing Berlin wants is anything that might ferment extremism in its own backyard.
Two, if Syriza was seen to “win”, it would encourage others to pursue the same strategy, most notably Spain, which faces a general election in the Autumn and where a Syriza-like populist movement, Podemos, is riding high in the polls. To the German way of thinking, it would almost guarantee a Podemos victory and Europe’s descent into destabilising and economically illiterate populism.
Three, further compromise would be seen as an act of betrayal against those political leaders – again notably Spain’s beleaguered Mariano Rajoy – who have risked their political futures swallowing Berlin’s medicine and pushing through painful reform.
Support for German intransigence among the incumbent governments of Europe should not be underestimated. For most, the austerity is largely over. It would seem cruelly perverse to be drummed out of office having come so far, only to watch Europe’s puppet masters cave into those who have won power by claiming they can refuse the treatment. In any case, Mr Rajoy, and perhaps others too, may be even keener than Berlin to see Greece ejected, if only to demonstrate what happens if voters follow Syriza’s high risk tactics.
To this list of political threats should be added the belief – almost certainly misguided – that it no longer matters to the rest of Europe if Greece is thrown out, with adequate backstops now in place to prevent wider contagion. In these circumstances, Syriza would appear to have but one, somewhat miserable, card left to play – that if Greece is let go, it would soon become another failed state on Europe’s doorstep. With the radicals in charge, this is sadly all too likely to be true.
Everyone loves an underdog, and anyway, the economic case for further Greek debt forbearance is pretty much unarguable. This makes markets believe in happy endings. In exasperation at the sight of Europe tearing itself apart again, the Americans are sending in a debt mediation team. Perhaps Britain, as an outsider, could play a role too. It still needn’t end badly. Unlike financial markets, however, I would no longer bet on it.
But no matter. There was a brief bout of nerves following this “bombshell”, but markets soon recovered their poise. One way or another, they have convinced themselves that it will be fine in the end. Well here are the three key political reasons why Berlin is most unlikely to compromise in any meaningful sense, even though cutting Greece slack bears zero economic cost and arguably avoids a major European implosion.
First, compromise might have serious political repercussions in Germany itself. Throughout Europe’s economic crisis, Germany has been a beacon of broadly sensible, centrist, political stability, apparently immune to the populist movements which are overwhelming others.
Germans are natural disciplinarians, and they don’t take kindly to the idea of bailing out those who flout the rules, however oppressive. If Wolfgang Schäuble, Germany’s hard line finance minister, needed further convincing, he only had to look at Bild-Zeitung, the German equivalent of Britain’s Sun, in which a poll suggested that 68 per cent of Germans were against any further concessions.
To compromise with Syriza would be to give succour to Germany’s own populist upstarts, not least Alternative für Deutschland, a party which has rocketed in the polls since taking on an overtly Islamophobic message. Given relatively recent historical experience, the last thing Berlin wants is anything that might ferment extremism in its own backyard.
Two, if Syriza was seen to “win”, it would encourage others to pursue the same strategy, most notably Spain, which faces a general election in the Autumn and where a Syriza-like populist movement, Podemos, is riding high in the polls. To the German way of thinking, it would almost guarantee a Podemos victory and Europe’s descent into destabilising and economically illiterate populism.
Three, further compromise would be seen as an act of betrayal against those political leaders – again notably Spain’s beleaguered Mariano Rajoy – who have risked their political futures swallowing Berlin’s medicine and pushing through painful reform.
Support for German intransigence among the incumbent governments of Europe should not be underestimated. For most, the austerity is largely over. It would seem cruelly perverse to be drummed out of office having come so far, only to watch Europe’s puppet masters cave into those who have won power by claiming they can refuse the treatment. In any case, Mr Rajoy, and perhaps others too, may be even keener than Berlin to see Greece ejected, if only to demonstrate what happens if voters follow Syriza’s high risk tactics.
To this list of political threats should be added the belief – almost certainly misguided – that it no longer matters to the rest of Europe if Greece is thrown out, with adequate backstops now in place to prevent wider contagion. In these circumstances, Syriza would appear to have but one, somewhat miserable, card left to play – that if Greece is let go, it would soon become another failed state on Europe’s doorstep. With the radicals in charge, this is sadly all too likely to be true.
Everyone loves an underdog, and anyway, the economic case for further Greek debt forbearance is pretty much unarguable. This makes markets believe in happy endings. In exasperation at the sight of Europe tearing itself apart again, the Americans are sending in a debt mediation team. Perhaps Britain, as an outsider, could play a role too. It still needn’t end badly. Unlike financial markets, however, I would no longer bet on it.
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