Greece forces Germany to weigh austerity endgame

Letting Greece leave the EU would be a reckless gamble. If Germany refuses to bend, it will be held responsible for whatever happens next.

By MSNMoney partner May 10, 2012 2:14PM

Greece's elections have confirmed its role as the worst pupil in the euro-area class. But with all respect to Paul Krugman and others, austerity isn't dead: It's now up to Germany to decide whether to ease up or hold firm and watch Greece leave the euro.


The May 6 vote showed clearly that Greeks aren't willing to accept further cuts. Almost 70 percent of voters backed political parties -- from anti-Europeans to neo-fascists -- that oppose sticking to the terms of the two bailouts since May 2010.


There's now a high likelihood the country will miss its next deadlines under the 130 billion euro ($169 billion) program it agreed to in February. That means the European Union and other exasperated international creditors may soon have to decide whether to pull the plug, leaving Greece to default and exit the euro. Economists at Citigroup Inc. say the odds of that happening in the next 18 months are now as high as 75 percent.


The mild reaction of currency and equity markets -- outside Greece -- after Sunday's election shouldn't fool anyone. Letting Greece go would be a reckless gamble with the future of the single currency, risking political turmoil and unknown consequences for the European project as a whole.


The center-right New Democracy party, which came in first in the election with just 19 percent of the vote, has already said it's unable to form a government. Others will now try, but even if a rickety coalition is assembled, it won't have a mandate to stick with the current austerity program.


That makes it hard to see how the parties can form a government able to meet the May 31 deadline for Greece to elaborate further deficit reductions worth 5.5 percent of gross domestic product for 2013-2014. That's on top of a reduction in the primary deficit (excluding interest payments) of 8.25 percent of GDP that Greece already made and that affected mainly pensioners and wage earners, rather than wealthy tax evaders.


No wonder Greek voters are mad. But if the government misses the deadline, then the so-called troika monitoring Greece's bailout (the International Monetary Fund, the European Commission and the European Central Bank) has indicated it would halt further payments. German Chancellor Angela Merkel said Monday that it was of "utmost importance" that the government in Athens continue its program. Greece is due to get about 30 billion euros, much of it for recapitalizing the country's banks, in the second quarter. A little less than 4 billion euros of bonds come up for redemption over the next month.


Greek officials say that if bailout funds are halted, they would run out of money to pay pensions and salaries within weeks. Given that the state power company recently had to be given emergency funding, the lights might literally go out.


There are two ways to respond. One is to give the Greeks more time. Even though they are repeat offenders, there are signs that they are finally on track with the fiscal side of the program. In March, bank deposits finally began to rise, for the first time since 2009. The alternative is to stick with the austerity plan's deadlines and impose more tough love.


Under that scenario, the flow of money would be allowed to stop, making Greeks understand the true cost of going it alone. Then, when they hold fresh elections, by candlelight if need be, the result might be different. If it isn't, Greece could be allowed to default and spin out of the euro, strengthening the remaining currency zone.


Although an anti-bailout party roared to second place with 17 percent of the vote, and the neo-fascist Golden Dawn received 7 percent, making it into parliament for the first time, opinion polls suggest more than two-thirds of Greeks still want to keep the euro. They just don't want the austerity plan that goes with it. They would now understand that they can't have it both ways.


The trouble with tough love is that it may not work -- politics isn't always rational. It also could have unintended consequences. True, Greece's debt has been transferred from private hands to the ECB and other sovereigns better able to absorb the losses. But a default could cause investors to wonder just how determined euro-area leaders would be to save Spain, Portugal and Ireland. That could trigger bank runs and capital flight in those countries, with ripple effects for France and even Germany. Those kinds of concerns might help explain why investors are suddenly snapping up insurance on German debt.


The ultimate decisions will have to be taken by Germany, the euro area's unwilling guarantor. So far it has preferred partial -- and ineffective -- responses to the crisis, rather than bolder -- but necessary -- steps that we have advocated before, such as common euro bonds or a firewall big enough to cover the potential risks. Unfortunately, Germany seems prepared to offer more partial solutions to Francois Hollande, France's president-elect, as he presses for a growth pact to accompany austerity.


Three years into the crisis, it is clear that markets need to be convinced that Greece, Italy, Spain and others will be able to pay their sovereign debts, now and in the future. Otherwise, these countries will pay usurious rates that exacerbate the meltdown.


Taken as a whole, Europe's finances are sound, and it can afford to pay: The euro area's consolidated budget deficit last year was 4.1 percent of GDP, less than half the U.S.'s 9.6 percent. Common euro bonds would fix the problem of shoring up struggling countries, but would require Germany to pay higher interest rates for credit.


There's little sign that the German government or the ECB want to change course. Finance Minister Wolfgang Schaeuble oozed contempt recently when he said that Germany might make some gestures on growth measures to allow Hollande to "save face."


Greece's chaotic election result will force a hard decision on the euro area soon. The best course would be for Germany to acknowledge that it will have to risk more by agreeing to some form of euro bond, boosting demand at home, tolerating a little more inflation, and giving Greece, Spain and others more time to meet their fiscal targets.


Any comparison to the 1930s is overblown, but the political scene in Europe is fragmenting. The rise of anti-European and, in some cases, xenophobic parties in France, Greece, Italy, the U.K. and elsewhere is disturbing. If Germany refuses to bend, then it will, fairly or not, be held responsible for whatever happens next.

More from Bloomberg

May 11, 2012 2:22PM

The simple fact is that when you get far enough down the debt "black hole" there is no way out but one kind of austerity or another. If you do your own austerity early enough, you may make the necessary structural changes required to get past it. That's what Greece WAS on the road to do. Now it looks like they'll take the other route and go down the hole. If they just default, there'll be no more deficit spending because no one will buy their bonds (or only at exorbitant rates), so there will be even more austerity to balance the books. All of this is good in the long run because it leads to real change, which is what they have to do one way or another.


I can't imagine the German taxpayer is willing to keep ponying up so the Greeks can have their cake and eat it too. If they are, they deserve what they get. But I think every German politician knows they won't keep putting up with it, especially when the Greek government won't live within their means.

May 10, 2012 8:54PM
Europe and the US better get their act together.  Business will flee to better climates and we'll watch our standard of living go with it.
May 14, 2012 11:19AM
Unfortunately, the people of Greece are not the only stupid ones.  We have an electorate in this country (USA) that is so poorly educated, they continue to believe politicians can give them something for nothing.  They all want freebies and the promise of a life modeled after "Julia".  They are too stupid to understand what serfdom means.  For those of you who are black, African-American, or who have been oppressed, shame on you.  Your parents and grandparents lived through slavery, many struggles, the pain and the agony just to enjoy the freedoms this country offers.  Now that those are available to you, you choose to criticize for what you don't have, instead of lifting yourself up and using the God given talents you use to become a contributor rather than a taker.   No other country, anywhere, offers what the U.S. does.    By supporting this administration's policies we will become slaves once more and be told what food we must eat, what light bulbs we must use, what cars we will drive, etc. etc.  Will America wake up or face the same fate as Greece??  In a few short months, we will know the answer.
May 10, 2012 11:55PM
someone should play video of Russia & Argentina default on the bond...very bad depression.
May 14, 2012 8:28PM
Europe's debt problems can't be fixed with more bailouts.  Without sound fiscal policy, they are only postponing the inevitable.  And I knew no MSN author could write an article without a "tax the rich" plug.
May 14, 2012 1:45PM
And somehow this is a surprise?  Spain will be next
May 14, 2012 8:32PM

It would be beneficial for the "Eurozone" to disolve and for the countries to return to the old governments and currency.


This "One-World" notion is impossible because of all the radicals that exist and the few countries trying to hold this together will be brought down to the level of the wanna-be's.


I for one, do not see the advantage to developing a "One-World" order, or currency, or governments for that matter.


Just as the Idiot running the white house in the US is trying to do with our souventy and if this happens, the USA will  no longer be...................

May 16, 2012 9:54AM
like most investors I"m sick and tired of hearing about this country,and how they are pulling the markets down.compared to the rest of EUthey R nothing more than a blemish in the grand scheme of things .enough all ready!!
May 16, 2012 9:27AM
May 11, 2012 11:44AM
What this article fails to mention is who came too power... The new Democrat party is the Extreme Left of the spectrum. They also failed too mention that for the first time in almost 4 decades the Extreme Right came too power and qualified for parliament for the first time in 30 years. Yes since the military insurrection.

They also fail too mention that WHEN GREECE goes Spain is Next and Germany Will pullout next.... The Euro Experiment is OVER!  Unless they just print money for Greece and expect nothing.

They also fail to mention that the OTC market is 700 Quadrillion in Debt! Yes the Black Hole that can't be paid off; and its all the Bankers Debt... The American People won't pay for this on there back's... Why do you think Homeland Security bought 400 million hollow point rounds? They know the American people have 7 Billion Rounds... Smile

Seattle206723 You Tuber bringing common sense to a world of Madness...

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.




Quotes delayed at least 15 min
Sponsored by:


There’s a problem getting this information right now. Please try again later.
There’s a problem getting this information right now. Please try again later.
Market index data delayed by 15 minutes

[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%).

Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, ... More


There’s a problem getting this information right now. Please try again later.