How Germany Prevailed in the Greek Bailout - New York times

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How Germany Prevailed in the Greek Bailout
By NEIL IRWINJULY 29, 2015

BERLIN — At the height of crucial negotiations over the latest bailout of Greece this month, Germany circulated a proposal that undercut decades of promises about the march toward deeper European unity: Greece, it said, could be offered a temporary exit from the euro.

The proposal reflected some muscle-flexing by hard-liners in Berlin. But it was first broached privately not by the Germans, but by Slovenia, a tiny eurozone member whose finance minister demanded a “Plan B” for a leftist Greek government he compared to the former Yugoslavia’s Communists.

Slovenia’s proposal was a double triumph for Germany. Greece’s economic crisis not only has done nothing to soften Germany’s insistence on adherence to rules, fiscal austerity and dire consequences for countries that fail to live up to their obligations, but it has also actually reinforced the willingness of Germany’s allies in Europe to impose even harsher conditions on Athens.



Prime Minister Alexis Tsipras of Greece said that securing a new bailout deal was a priority.Tsipras Seeks to Avert Party Split as Greece’s Creditors Arrive for TalksJULY 29, 2015

Yanis Varoufakis, Greece’s former finance minister, wrote in a blog post Monday that the country would have “been remiss had it made no attempt to draw up contingency plans.”Greece Made Preparations to Exit EuroJULY 27, 2015
Alexis Tsipras with Panos Skourletis, the energy minister, at a parliamentary session in Athens.Greece Approves Second Set of Changes Needed for BailoutJULY 22, 2015
Once seen as an idealistic radical, Alexis Tsipras, Greece's leader, is emerging as something else entirely.Alexis Tsipras, Greek Prime Minister, Sheds His Identity as a RadicalJULY 21, 2015
The European Central Bank effectively forced Greece's banks to close on June 29, when it capped the emergency cash it provides to them at €89 billion. That limit will now be €89.9 billion.European Finance Officials Agree ‘in Principle’ on New Greek BailoutJULY 16, 2015
From Lisbon to Latvia, from creditor countries to debtors, among some left-wing leaders as well as conservative governments, the response to Greece reflected a deep aversion to government spending as a tool to fight economic slumps and faith in deregulated labor markets. It is a vision of austere, market-based policies that are a break with Europe’s past.


Germany persuaded European leaders to rally more firmly around what might be called the Berlin consensus by a combination of patient diplomacy and clever brinkmanship and by exploiting alarm over the antics of Greece’s leaders, numerous participants in the crisis talks recounted in interviews.

It was a victory, many of those participants acknowledge, that reflected the politics of today’s Europe rather than a viable plan to help Greece’s economy in the short run. Despite forecasts that recovery would follow the bitter medicine Germany and lenders like the International Monetary Fund have been prescribing for Greece for five years, the country is stuck in a depression-like slump. The latest package tightens austerity rather than relieving it.

In the view of many economists, particularly in the United States and Britain, the continued imposition of a budget-cutting-first approach during an extended downturn is holding back recovery not just in Greece but also across the Continent, which continues to suffer from towering unemployment and tepid growth years after the United States began recovering from the financial crisis that started in 2008.

The eurozone unemployment rate is above 11 percent, more than double that of the United States. Its economic output in 2014 was lower than in 2007, before the global crisis.

Youth unemployment is particularly high, raising the possibility of long-lasting damage to the Continent’s economic potential as young people are idle at a time when they would normally be developing key skills. Nationalist and populist political movements on both the left and the right, drawing strength from economic dislocation, are undermining support for European unity.


“The belief that the euro can be used to bring about the economic ‘re-education’ of Europe’s south will prove a dangerous fallacy — and not just in Greece,” Joschka Fischer, a left-leaning former German foreign minister, wrote this week.

The rising influence of the Berlin consensus despite these trends has much to do with the political backlash in Europe to the Greek government under Prime Minister Alexis Tsipras and his radical-left Syriza party. Mr. Tsipras’s heated arguments against austerity, however much they reflected the views of many economists, were undermined at least in part by his government’s inconsistent policies and frontal challenges to German leadership.

But previous efforts by the current governments of France and Italy to encourage more flexibility in imposing austerity have also made little headway.

Like Greece, they have run up against a combination of subtle German diplomacy by its seasoned center-right leaders, Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble; German credibility and power derived from a strong domestic economy; and, perhaps most important, domestic political considerations in countries across Europe that are encouraging their leaders to express greater devotion to the German way of doing things.

That philosophy, as applied since the financial crisis began upending global economies in 2008, transcends typical lines of right versus left (one of the chief engineers of the latest Greek bailout, which demands new austerity and major reforms, was the Dutch finance minister, who is from his country’s Labour Party). And it is not simply a matter of creditor versus debtor (Portugal, among other debtor countries that signed on, insisted Greece make the same difficult reforms it has).

In the end, in a crucial debate that set up Europe’s position against Greece in negotiations the week of July 12, 15 nations embraced the hard-line position with only three, France, Italy and Cyprus, isolated as preferring a more generous approach open to debt forgiveness.

“Yes, certainly Germany has been in the driver’s seat through this process, there’s no denying it,” said Alexander Stubb, the Finnish finance minister and one of Berlin’s hard-line allies. “Part of it is personalities. Part of it is Germany’s economic track record. But it’s also that they know their stuff. They go into negotiations well prepared and with a determination to stick to the rules we’ve agreed on.”


Germany has long been known as Europe’s “reluctant hegemon,” for its reluctance to be too assertive in diplomacy given its history of militarism. But the unique circumstances of the Greek crisis, especially since the start of this year, have helped make it a country that is both a little less reluctant and a little more of a hegemon.

Merkel’s Deft Touch

There is a common thread in Ms. Merkel’s uniquely influential role guiding the politics of Europe throughout the financial crisis and its aftermath. At the same time that she has been the leading voice for the principle that countries must follow the rules and pay the consequences if they do not, she has also embodied the strong German instinct to keep knitting Europe closer together.


To do so, she has applied a deft diplomatic touch. The German government maintains a fleet of Airbus planes marked “Bundesrepublik Deutschland” for its high officials, and Ms. Merkel has made full use of them in her decade at the head of Western Europe’s largest economy.

She had visited what were then all 27 nations of the European Union by the end of her first four-year term in office. She will often visit a country and return home the same day, much the way an American president makes the rounds to various states. She also cultivates foreign leaders at home, hosting them in Berlin with grand welcome ceremonies with military honors.

Within meetings of the European Council, she is almost uncannily immersed in the details of whatever is under discussion, crossing out lines and replacing words with a focus that might be expected of a former engineer.

Meanwhile, Mr. Schäuble, Ms. Merkel’s finance minister, is a hard-nosed politician who was paralyzed from the chest down by an assassination attempt in 1990, and he is more popular in Germany (70 percent approval in a recent ARD-DeutschlandTrend poll) even than Ms. Merkel (67 percent).

Ms. Merkel and Mr. Schäuble both bring long experience to the negotiating table that few can match. Mr. Schäuble has been in the German Parliament since 1972, two years before Mr. Tsipras was born.

When Mr. Schäuble circulated the proposal raising the prospect of a temporary Greek exit from the euro, he was able to do so knowing he had support from a number of other countries, like Slovenia, which first put forward the idea in April during a closed-door meeting in Latvia.

Ms. Merkel and Mr. Schäuble regularly mix forceful advocacy of German positions with a willingness to pull back in the interest of maintaining unity, above all with the other great power of the eurozone, France (Ms. Merkel and President François Hollande of France speak on the phone almost daily).

Mr. Hollande played the role of intermediary between Greece and its European creditors during the July negotiations. After Germany broached the notion of Greece’s temporarily leaving the eurozone, Ms. Merkel set aside the idea after objections from France and Italy.

And while Mr. Schäuble — known as tough and competitive — has a reputation as a hard-liner, he, too, knows the diplomatic art of using deference. In meetings of the European finance ministers, Mr. Schäuble rarely speaks first, generally leaving that role to a smaller country, before coming in with his own comments on the subject at issue later.


Greece’s Debt Crisis Explained
Behind the efforts to resolve the country’s debt problems and keep it in the eurozone.



“Mr. Schäuble has his vision, his point of view, that he puts on the table,” said Johan Van Overtveldt, the Belgian finance minister. “But he never says, ‘Take this or leave it.’ He has been very democratic. I can’t remember one point in time where there was a diktat.”

Indeed, while from an American or British vantage point the Germans often seem like the heavies in negotiations over the Greeks, they have actually been restrained by the standards of German voters and some Eastern European countries.


“Mrs. Merkel has behaved in an incredibly modest way,” said Marcel Fratscher, president of the D.I.W. Berlin think tank. “You couldn’t find her saying a bad word about Greece or anything populist, and even though German public opinion was very strongly in favor of a Grexit and no bailout deal,” he said, using shorthand for a Greek exit from the eurozone, “they secured a deal with no Grexit.”

The Greek government often took a rather different approach.

Conflicting Greek Signals

When Mr. Tsipras’s Syriza party won the Greek elections in January, it was determined to change the entire playing field for European economic policy.

But rather than rallying the opponents of austerity to their cause, the Greeks sent so many conflicting signals that even potentially sympathetic governments became exasperated, never more so than when Mr. Tsipras abruptly decided in late June to subject European demands for a new bailout package to a national referendum.

A dynamic that might otherwise have been debtor countries versus creditor countries or North versus South instead became Everybody versus Greece.

The Greek economy had been devastated by a series of spending cuts and tax increases demanded since 2010 by the “troika” of the European Commission, the International Monetary Fund and the European Central Bank (or “the institutions,” as Mr. Tsipras’s government asked that they be called to avoid the negative connotations that had built in Greece around the term “troika”).

When elected, Mr. Tsipras pledged to force Europe to focus on spending money to encourage growth, writing down unmanageable debts, and helping Greece and other troubled economies like Italy and Ireland get back on their feet. He tried to rally support among Europe’s left-wing parties in hopes of generating a mass democratic uprising.

“The issue of Greece does not only concern Greece,” Mr. Tsipras wrote in the French newspaper Le Monde in May. “Rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.”

But while Mr. Tsipras attracted allies like Podemos, a similarly inclined left-wing party in Spain, the mainstream governing parties of Europe viewed Syriza’s ideology as more of a threat than a way forward. They feared that making major concessions to Greece would only strengthen their own domestic opponents when many European electorates were flirting with anti-European populist movements.



A job fair in Spain, where the unemployment rate has been above 20 percent for five consecutive years. Youth unemployment in the eurozone is particularly high. Credit Samuel Aranda for The New York Times
“Calling the referendum was the moment when 95 percent of the creditor countries said: ‘That’s it. I don’t want to be blackmailed by Greece, and don’t want to live in a union with a country that blackmails me,’ ” said Guntram Wolff, the director of the Bruegel think tank in Brussels.

At a crucial moment in late June, the finance ministers met and excluded Yanis Varoufakis, then Greece’s finance minister, from the room, a symbol of how isolated the country had become.

After the decision, the European Central Bank president, Mario Draghi, said in the closed-door meeting, “I guess we can go back to calling it the troika.”



Mr. Tsipras was not the first European leader to try to push the Continent’s politics away from austerity. Mr. Hollande did the same after his election in France in 2012, as did Matteo Renzi when he became Italian prime minister last year.

But they have had little more success than the Greeks in altering policy or even shifting the terms of the debate. Mr. Hollande, for example, has advocated, so far unsuccessfully, “Eurobonds” in which European countries borrow money collectively that could be used to fund infrastructure projects or other growth-spurring investments without exposing any individual country to the risk of excessive debt.

Part of the reason is the rise of domestic political constraints on anything that could put taxpayers in one country at risk for economic mismanagement in another. Just as the unpopular United States bank bailouts of 2008 and 2009 helped usher the Tea Party’s small government philosophy into prominence in American politics, the use of billions of euros in European taxpayers’ money to aid Greece has been a boon for the populist right.

In Slovakia, a coalition government fell because of its support for a previous Greek bailout. In Finland, a right-wing populist party now known as the Finns is part of the governing coalition and opposes concessions to Greece.

In particular, the nations allied against the Tsipras government fear that writing down Greek debts further would only encourage other countries with high debt burdens — particularly Italy, with debt of 132 percent of its gross domestic product.

The leaders of the debtor countries themselves, meanwhile — especially Ireland, Portugal and Spain — have complex incentives of their own.

Those economies have suffered from years of misery amid the imposition of fiscal austerity, including a Spanish unemployment rate that has been above 20 percent for five consecutive years.

There are modest flickers of hope; the Spanish economy grew 1.4 percent in 2014, for example, after contracting for the three previous years. So leaders of Spain and the other debtor countries can point to that progress as evidence that they were right all along to acquiesce to painful cuts and reforms.

“We must appreciate the difference between serious policies and unserious policies that lead to situations such as those in Greece, where people can’t access their own money,” said Prime Minister Mariano Rajoy of Spain in a recent news conference.

For now, the core of Europe remains 19 countries with very different economies, their own budgets, and yet a single currency. That means when some countries are persistent debtors and others persistent creditors, it becomes hard — as the last five years has shown — to fix the imbalance.

“Debtors and creditors in the end never have a good relationship,” said Hans-Werner Sinn, a leading German economist. “It is like between friends. If you have a friend you don’t give him a loan, you give him a gift. You make a gift and don’t expect to get it back. But when you become his creditor he stops being your friend.”

Reporting was contributed by Alison Smale and Melissa Eddy from Berlin, James Kanter and Andrew Higgins from Brussels, and Jack Ewing from Frankfurt.