EURO ZONE
Greece – and Spain – put Merkel in a no-win situation
ERIC REGULY - EUROPEAN BUREAU CHIEF
ROME — The Globe and Mail
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The Greek quandary has put Germany into a no-win situation.
If Germany gives into the anti-austerity demands of Greece’s new Syriza government, the decision will embolden other anti-austerity movements in Europe, notably in Spain, where a Syriza-lookalike party, Podemos, is coming on strong.
If Germany gives Syriza nothing, Greece could well be forced out of the euro zone, wrecking the notion touted by the European Central Bank that the euro is “irreversible” and unleashing a bout of contagion that could send the euro zone back into recession.
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The strong support within Greece for Syriza – including a big pro-Syriza rally in central Athens Friday night – must be giving German Chancellor Angela Merkel a nightmare. It is signalling that voters don’t want Syriza to back down in the fight with Germany and its pro-austerity allies.
On Sunday, Greek Prime Minister Alexis Tsipras was defiant: Greece’s bailout program, which expires on Feb. 28, will not be extended.
“The bailout has failed,” he told parliament. “The Greek people gave a strong and clear mandate to immediately end austerity and change policies.”
Greece’s potential exit – Grexit – rocked the markets again on Monday. The main European stock indexes fell and Greek banks dropped by 10 per cent or more on fears that the deposit flight is accelerating. Greek government bonds plunged, pushing up the yield on three-year bonds by about 2.3 percentage points, to 20.4 per cent, the highest since March, 2012, the last time Grexit was a clear and present danger.
In Istanbul, where the Group of 20 finance ministers were meeting, Canadian Finance Minister Joe Oliver urged both sides to give ground.
“It’s clear that Greece has got to be prepared to make some changes, and I think a wholesale repudiation of their debt is not in the cards,” he told Reuters. “But other countries, creditors, will have to work with Greece to arrive at a compromise solution.”
At the same time, the Grexit odds are rising across the board. Over the weekend, former U.S. Federal Reserve chairman Alan Greenspan told the BBC that a Greek exit is inevitable, though he didn’t say when, and the British government admitted it was making contingency plans.
On Monday, Gary Jenkins, chief credit strategist at LNG Capital, put the odds at 50 per cent. Nicholas Spiro of London’s Spiro Sovereign Strategy is now giving Greece only a 30-per-cent chance of leaving, but that’s up from essentially zero before the election.
“It’s clear that Syriza fears the political consequences of backing down and is determined to push the envelope,” Mr. Spiro said.
As the biggest European economy and the main sponsor of Greece’s €240-billion ($339-billion) bailout program, Germany has the power to make or break Greece’s euro zone membership. But Germany seems to be in losing position.
Blame Spain.
Spain is grappling with austerity even though the country is not under an international bailout program (It did, however, request the European bailout of its banks in 2012, blurring the lines between a sovereign and a bank bailout).
Spain has come out of recession but its economy remains in tatters. The unemployment rate, at 23.7 per cent, is the second highest in the developed world, after Greece. Youth unemployment, at more than 50 per cent, matches Greece.
No surprise that the Spanish anti-austerity party, Podemos, has become a phenomenon. The party did not exist a year ago; it’s now winning the political beauty contest. A new poll released Monday gave Podemos 27.7 per cent, a commanding lead over the conservative Partido Popular party of Prime Minister Mariano Rajoy.
Spain faces a general election in the autumn and if the polls hold up, Mr. Rajoy and his pro-austerity colleagues are goners.
The political and economic calculus of Ms. Merkel and her Finance Minister, Wolfgang Schaeuble, must be painful. Germany must know that if it gives Greece what it wants – the end to austerity and a debt-lite agreement – Podemos would win the Spanish election and demand similar anti-austerity relief.
Ditto the ample anti-austerity movements in Portugal and Italy. In effect, giving in to Syriza could kill austerity, the combination of tax hikes and spending cuts that are the cornerstone of Germany’s fix-Europe strategy, in all of southern Europe.
On the other hand, allowing Greece to self-destruct would get rid of a country that should never have been in the euro zone in the first place because of its weak fiscal situation and discourage Podemos from Syriza copycat tactics.
Plus, it would please the German electorate, which is losing it patience with Greece and knows full well it will never be able to repay its enormous debt. Spain is the euro zone’s fourth-biggest economy. Germany may decide that sacrificing Greece is the price to pay to keep Spain in the family fold. The trouble with letting Greece go is the unknown, and potentially dire, economic consequence.
Of course, a classic euro zone fudge is possible, where Greece gets a little of what it wants and Syriza dresses up the meagre gruel as a victory. But based on Syrizia’s hard-line stance and encouragement from voters who are sick of austerity, this is one time a fudge may not work.
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