German Proposal for Greece’s Compliance: Accelerating Eurozone Exit
At the top of my list of to do’s for the past few weeks has been to update the post on Greek PSI that I wrote just before Christmas to include some more recent developments, such as the prospect of ECB participation. Last night, Peter Spiegel from the Financial Times (@SpiegelPeter) published the German government’s proposal for Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece will need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone.
Germany’s proposal for Greece caught most by surprise, but we shouldn’t be so shocked by it. The ruling German Christian Democrat party (CDU) already published this idea in its November 2011 proposal for “A Strong Europe—A Bright Future for Germany”. According to this proposal, if a country is unable to meet its debt obligations, “the European Commission should provide the affected eurozone country with a commissioner responsible for budgetary savings, who would oversee the use of budgetary funds and the implementation of any restructuring measures that may be required.” The CDU goes on to propose that a clause should be created in the Lisbon Treaty to allow a country to voluntarily withdraw from the eurozone without exiting the EU.
This clause for a voluntary eurozone exit increasingly seems like a preview for things to come in Greece. Greece is currently in the midst of negotiating a PSI deal, without which it faces a hard default when it must roll over €14.5bn in debt on March 20th. There are only around 45 business days left before this deadline, an extremely tight schedule even without the huge distraction of Greece fighting for its fiscal sovereignty. The best case scenario is that a PSI agreement is reached, but will that really make a difference? If the Greek government does not sign up to the German proposal and Germany does not back down, a hard default by Greece is still likely.
Is the Greek government likely to agree to transfer its fiscal sovereignty to Brussels? Some Greeks have argued that the population would be better off if Greece’s fiscal discipline were in the hands of Eurocrats rather than corrupt Greek politicians. I think it highly unlikely a bureaucrat chosen by the Eurogroup would have more success changing the political culture and Greek attitudes towards corruption, wasteful spending or tax evasion any better than the Greek government can. Regardless, the Greek government has so far indicated it is dead set against the idea. When asked about the German proposal, one Greek government source responded “there is no way we could accept such a thing.” The government released an official statement saying responsibility for fiscal policy rests solely with Greece.
If the Greek government rejects the German proposal and the troika refuses to transfer any more tranches of funds to Greece, Greece will default. Without any access to market or official funding and running a primary deficit, Greece would be forced to abandon the common currency and reissue the drachma for the government to carry out basic public services and continue to pay civil servants. Greece would also be forced to exit the eurozone in order to regain competitiveness and return to growth.
I have long thought that the troika would cut Greece loose and let it default and exit the eurozone once eurozone banks had been sufficiently firewalled. Perhaps this aggressive proposal by Germany is one of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO). If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default. Greece is clearly insolvent and must leave the eurozone to eventually return to growth. The German proposal may have accelerated the inevitable.
This post originally appeared at Economist Meg and is posted with permission.
15 Responses to “German Proposal for Greece’s Compliance: Accelerating Eurozone Exit”
Oscar • January 30th, 2012 at 3:47 am
Germany now actually want Greece to go bankrupt!!! That is why they will do things to help make this happen from now on. This is because Germany wants Greece to be an example to other larger economically failing countries, like Spain and Italy, that if you don't shape up you will go bankrupt and your country will suffer for a very long time. Germany has realised that it is better for the EU to let Greece go bankrupt and survive then to waste more bailout money on them and only encourage other countries to also look for a bailout….
Aegean1972 • January 30th, 2012 at 10:39 am
It costs ALOT LESS for the EU to save Greece with 250 billion euros, than let it default and start a tsunami of unthinkable proportions that will seriously shake the foundations of the euro-zone for the next 5 years. Lets face it. If Greece defaults, Portugal is next and then Italy. And Italy cant be saved. Italy's debt to GDP will cross the 160% line soon enough.
So if Greece exits, the virus will spread to the rest of the euro-periphery. The CDS holders will also trigger it. The fire will get so out of control, that Europe -as we know it- will be over in the next 5 years.
think of Greece as a climber who is on top of the mountain (during a snowstorm) and attached with a rope to the rest of the climbers (Italy, Portugal, etc) who are right below him. If the top climber free falls, you have a good chance that he will drag the rest of the climbers to the abyss with him.
We cant let that happen. Unless we want a world financial-armaggedon
phraathit • January 30th, 2012 at 12:23 pm
What is all the talk about a fiscal union and fiscal discipline worth of, if in the case of Greece the whole concept is invalidated? Up to now there has been a lot of talking about new rules to enforce the stability and growth pact. If Greece get's along without meeting any of its agreements made with the troika, who will belive in any of the new regulatory frameworks implemented last year? Consequential inconsequence has been at the heart of the failure of the monetary union from the beginning. If the member countries cannot agree on common rules, the fiscal and monetary union will not prevail. It is impossible to have both of it.
It is also a typical reaction to start a blame game on Germany. It's about common rules and regulations. Greece has been de facto bancrupt long ago. The consequences of bancruptcy are quite clear. The political leaders of the Eurozone have created a parallel universe of a bypass to avoid the obvious. But it has been a fairy tale from the beginning. Economics has always been called a dismail science. Let's face reality.
Here is a nice analysis of Alan Greenspan on the emergence of the difficulties emerginf from the Eurozone frrom last November 2011
http://www.youtube.com/watch?v=59G6LRiDhgw
fondoalerta • January 30th, 2012 at 1:14 pm
A long agony. It's like the "Chronicle of a Death Foretold" by Garcia Marquez.
We all know what is going to happen. Only a few, how and when. No one, what will be the real impact on markets confidence
brhaman • January 30th, 2012 at 2:06 pm
Greece have two choice leave or take it, By leaving Greece chance to default and isolation, by accepting Germany''s offer, the tops are effected , other wise the proposal is lucrative.
The choice is open to decide in 45 days/
There may be a yes in NO?
brhaman • January 30th, 2012 at 2:11 pm
Greece have two choices leave or take it, By leaving Greece, chance to default and in isolation, by accepting Germany''s offer, the tops are effected , other wise the proposal is workable. If Germany really stands on its proposal, The proposal was proposed by a member in the house not Germany it self, So re-check if it is a effective proposal/
etc • January 30th, 2012 at 2:16 pm
An take into account that Italy might be too happy for returning to lireta. The other day Fiats CEO said that in an event of Euzo break up, German competiveness would plumet. BMW CFO said that no matter the cost the euro must be saved. I dont see why exiting Euro would not profit the Alfa Romeo vs the BMW sales.
etc • January 30th, 2012 at 2:18 pm
The Troika tries to pass the thundering failure of its policy to Greeks. If Troika is so succesful why the eurozone is trumbling and not just Greece? Two yeaars before was onluy Greece and now it is Portugal Ireland and may by Italy, Spain and Belgium.
Is it Troika and EU or Greek goverment that it is to blame?
etc • January 30th, 2012 at 2:22 pm
No when you say that you confiscate the taxes that I pay, in order to pay for your failed banks with the failed bets for forever growth, forever, its not a lucrative proposal. Better off isolated that forever bankslavery.
So far we have made a huge mistake by not returning on primary surplus in day 0, whatever it took, back at 2010, and let EU and ECB save its failed banks. We have little to lose now and this bad played theater wont continue for long.
diatoo1 • January 30th, 2012 at 7:50 pm
To give Greece 250 billion or more by accepting a corresponding hair cut, reduces Greek debt, but it does not save Greece because thereafter it will be as uncompetitive as now and the whole drama will begin again from square one.
Let it go broke asap and return to Drachme and devalue. Only that will help them to become competitive. Ok next will be Portugal. Same procedure. But Italy is rich enough to help itself. It is no god policy of the Euro zone to burn hundreds of billions to no avail.
phraathit • January 30th, 2012 at 8:48 pm
I agree that it is not Greece alone. Furthermore we all know about the IMF stabilization programs in the developing countries and their negative impact. So this is not a surprise for me that the programs did not work.
However, Greece has made a bad economic policy over years before. The EU Commission never took action and will not do now. So who is going to pay for the bad policies?
In the actual print copy of the German Spiegel magazine there are four interesting numbers. In 2008 the Greece debt was 263 bill. Euro. In 2011 in has increased to 355 bill. Euro. An additional 92 bill. Euro in just three years.
The Greek GDP numbers are 233 bill. Euro in 2008 and 218 bill. Euro in 2011. A moderate decline of 15 bill Euro. As the data source the European Commission is mentioned. Values for 2011 are estimated. How is it possible that the Greek economy shrank so little and the debt increased as much? I have no answer for this yet. SOmething different seems to be going on. According to the National Bank of Greece the 95 bill. Euro have been transfered by the Euro countries (53 bill. Euro), the IMF (20 bill. Euro) plus 22 bill EUro not classified. The ECB has bought for about 55 bill. Euro Greek government bonds. The remaining 205 bill. Euro are held by private organizations like commercial banks insurance companies, hedge funds,etc.
So what is the financial support financing? My guess is that the private debt is heavily overvalued. It is not mark-to-market but the nominal value at issuance. Therefore the indeptedness of Greece is overblown. If they could get a haircut of 70 percent on the private debt as it is discussed now, the private sector debt would shrink to 61,5 bill. Euro. If the ECB would cut its Greek assets by the same amount, it would add another 16,5 bill. Euros. This would be a huge debt foregiveness from 260 bill Euro to 77 bill. Euro. Not a bad trade for Greece, if it would work out. Greece would than have only an overall debt of 172,- bill. Euro left. Taking a GDP of 218 bill Euro as the denominator in 2011, the Greek debt to GDP ratio would shrink to 79 percent. Greek would not have reduced its debt to 120 percent in 2020 but to 79 percent in 2012. This would be really a Greek miracle of debt foregiveness. Even if the ECB would reject a haircut Greece would be much better off, than the general public perceives. The whole story is not what it looks like. But that's politics.
Cedric • January 31st, 2012 at 5:41 am
Greek wages need to be cut by 40% for it to become an efficient economy and that's never going to happen without exiting the Eurozone.
Aegean1972 • January 31st, 2012 at 10:36 am
i totally agree. The euro-IMF plan that brought Greece to a depression, is about to be enforced to the rest of the euro-periphery. The consequences will be catastrophic.
Two years ago many voices were saying that this crisis wasnt a "Greek" problem, but a european one. The top-heads didnt listen and the result is now more than obvious. Portugal, ITaly, Spain, Belgium…one by one they are "loosing the plot". The situation is getting out of hand.
But still Europe doesnt do anything to solve this exploding problem. What are they waiting for? If the pressure cooker explodes it will be too late to turn the heat down.
chote • January 31st, 2012 at 3:37 pm
I do not understand the argument that Greece can not regain competitiveness. Most of the country's income is from tourism. Would it be possible to reduce the hotel rates and prices on their menus to attract tourists?
diatoo1 • January 31st, 2012 at 4:34 pm
How can they reduce hotel and menue prices by 40%? Only by reducing wages, pensions and other costs by 40%. First that is unlikely to be possible in Greece. Second tourism is most likely not enough to bring the Greece current acount balance back to positive.
