Angela Merkel's Disastrous Part in the Greek Crisis

Angela Merkel's conduct during the Greek crisis exposes her as weak, indecisive and treacherous:

  • evading responsibility
  • putting off difficult decisions
  • taking the line of least resistance
  • and bullying the weakest party to get herself out of trouble.  

The result has been to land Germany and Europe with a situation in Greece that everyone agrees is unsustainable and in the end disastrous.

Tue, Jul 14, 2015
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Finger-wagging: Tsipras is weak and indecisive, but so is Merkel

Though Russia is only indirectly involved in the Greek crisis, that crisis does once again highlight the problems Russia --- like everyone else --- has to face when dealing with Angela Merkel.

It is now possible from various sources to reconstruct in some detail the negotiations that led up to the deal that was finally done on Monday 13th July 2015.

I have already discussed how Merkel’s indecision and weakness meant that instead of being allowed to default quietly in 2010 Greece had imposed on it a financial package that left it with an unsustainable debt it could never repay combined with an austerity policy that doomed its economy to perpetual recession (see "Angela Merkel - The Empress Without Clothes", Russia Insider, 7th July 2015)

In January 2015 the Syriza party came to power in Greece determined to break this cycle. Fatally, it is now clear it was determined to do so whilst keeping Greece in the Eurozone. Former Greek Finance Minister Varoufakis has confirmed that no preparations were made for a Grexit. I have been told by reliable sources that Prime Minister Tsipras repeatedly rejected proposals from members of his party that he prepare for one.

Syriza’s election nonetheless highlighted what had already become obvious: that the present policy mix is unsustainable.  

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This was clearly understood by all the key parties: by the Greek government and the IMF, which wanted a debt write-off (that the IMF said should be at least 30% of GDP), and by German Finance Minister Wolfgang Schauble who as guardian of Germany’s finances categorically rejected a debt-write off so long as Greece remained in the Eurozone but who proposed that Greece be given a debt holiday outside it.

The story of the negotiation is that Merkel failed to adopt either of these two policies but gave each party at various times reasons to think she agreed with them, leading to a “compromise” that satisfies no-one, and which creates the worst of all worlds.

The Greeks in personal meetings with Merkel say they repeatedly found her seemingly sympathetic and reasonable, telling them that “where there is a will there is a way” (a favourite phrase of hers) and hinting publicly that a debt write-off might indeed be on the cards.

Greek Finance Minister Varoufakis has all but said that it was these hints and suggestions from Merkel that persuaded the Greeks to keep negotiating.

In the event not only was an offer of a debt-write off never made, but after the Greek referendum, responding to the outrage whipped up by her allies in Germany’s Springer press, Merkel suddenly appeared to swing decisively behind Schauble, ruling out a debt write-off and appearing to agree to his proposal for a Grexit combined with a debt holiday.

News Germany was now seeking a Grexit however caused horror in the US, alarmed by what this might mean to its geopolitical position, and in France and Italy, worried about what this would do to the credibility of the single currency and afraid that they might be next.

The result was that after appearing to back Schauble, Merkel flipped again. Instead of straightforwardly backing a Grexit, she made it into a threat, telling Greece it would be unceremoniously thrown out of the Eurozone if it did not accept even more austerity than it had previously done.

Some of these demands for more austerity are frankly outlandish.  

There is apparently a demand that Greece encourage greater competition amongst its bakers.

Greece is being asked to liberalise its Sunday trading laws --- a difficult step for a religious and socially conservative country --- despite the fact that Merkel’s own Christian Democrat party rules that out in Germany itself.  

The single most grotesque proposal is that Greek national assets be held in a fund controlled by a German state bank, which would raise supposedly $50 billion by selling them.  

Scarcely anyone believes these assets will raise even a fraction of this money.  The IMF thinks $7 billion is more realistic.

Beyond the utopian quality of this proposal, putting the whole process of privatisation and sell-off under German control creates a disastrous impression of Germany looting Greece in its own interests.  

Needless to say any possibility of the Russians buying any of these assets can now be definitely ruled out.

As for the mirage of debt-relief within the Eurozone, the wording of the final European Council Statement --- signed by Greece --- rules it out forever:

"The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.

"The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and in a timely manner."

The reason Merkel has bullied Greece to accept these absurd proposals (her officials openly brag that during the EU summit she had Tsipras “waterboarded”) is because she needs to keep Schauble - for whom the ruling out of a debt write-off was a make-or-break issue - in line, and in order to show them to the Bundestag when she seeks its approval for the bailout.  

Despite the absurdity of some of these proposals, the Greek government, with its banking system close to collapse, its almost religious commitment to the euro, and its failure to prepare an alternative, backed down and accepted the lot.

The result is to land Greece, Germany and Europe with the worst of all worlds: Greece remains locked in what amounts to a debtors’ prison with no prospect of release.  Europe is left with more bailout arrangements that Germany’s own Finance Minister believes are unsustainable. Europe has a crisis in Greece that shows no sign of end.

Wolfgang Schauble, does not deserve the criticism he is getting.

As guardian of Germany’s finances it is completely understandable that he is not willing to countenance a debt-write off for Greece while it remains in the Eurozone.  

Following Merkel’s disastrous decision in 2010 to override what everybody believed was in the treaties by bailing out Greece (see "Angela Merkel - The Empress Without Clothes", Russia Insider, 7th July 2015), it is understandable that Schauble feels that Germany cannot allow a state that has received a bailout to default and remain in the Eurozone.  

Given that because of that decision Germany has been put in the position of appearing to stand as guarantor for the sovereign debt of every state in the Eurozone, it is easy to see how allowing a state like Greece to default on its bailout whilst remaining in the Eurozone would set a disastrous precedent which could cause well-nigh unlimited losses for Germany if it is copied by other countries. Understandably, Schauble is simply not prepared to let that happen.

Schauble’s solution of a Grexit squares the circle, protecting Germany’s interests while allowing Greece time out to default and recover.

The trouble is that instead of backing Schauble’s clear and realistic policy, or in the alternative granting the Greek government’s request for a debt-write off which the IMF says is the only other way to end the crisis in Greece, Merkel balked at adopting either policy because doing one or the other would have led to a row with the other European leaders and the US in the case of the one, or with Schauble and those who support him in Germany in the case of the other.

The result is that Merkel, as she always does, took the line of least resistance by going after the weakest party, the hapless Greeks, extorting from them the concessions she needs to get herself out of trouble, without any thought to the long term consequences or to whether the Greeks can realistically deliver on them.  

Along the way, in order to cover her position, Merkel got her media allies in Germany and her officials to do something else she always does in these situations - which was pour abuse on the Greeks with claims that they had “betrayed” her and “let her down” so that she could no longer “trust them”.

The end result is to double down on the same policy that has already failed over five years:  more austerity in return for yet another bailout.  

Not surprisingly the entire economics profession is in despair, with many repeating Einstein’s famous definition of madness as doing the same thing again and again and expecting on each occasion a different outcome (see for example Larry Elliott’s comments in this video interview).

Meanwhile the international media can find nothing good to say.  Here are editorials in Le Monde, The New York Times, The Financial Times and the Guardian.

However for Germany it gets worse.  

By converting Schauble’s realistic and well-intentioned proposal into a threat, Merkel has secured for Germany the worst press it has known since the end of the Second World War.  

Germany now stands accused of trampling over Greek democracy and of bullying and humiliating a small and weak country in its own narrow self-interests.  

The hashtag “this is a coup” has gone viral and influential commentators in the Anglophone world are falling over themselves to condemn what has happened. See for example Wolfgang Munchau in the Financial Times, Boris Johnson in the Daily Telegraph (reproduced by Znet), Paul Krugman on his blog,  Suzanne Moore in the Guardian and the British historian Simon Schama on Twitter “If Tsipras was wearing the crown of King Pyrrhus this time last week, Merkel is wearing it now. Her ultimatum beginning of end of EU”.

Alarm has also been sown amongst Germany’s EU partners, especially France and Italy, who have been shocked by Merkel’s threat of a Grexit and the use she made of it.  

Matters are now so bad that Italian Prime Minister Rienzi made public his comment to Merkel “that enough is enough” and that she should “stop humiliating Greece”.

The cause of this disaster is that Merkel as a politician is not fundamentally interested in solutions to problems.

What she seeks is the appearance of solutions to get herself out of trouble. It doesn’t matter to her whether they are workable or not or what harm they will do along the way provided she can secure her position in Germany.

It is kicking the can down the road elevated to the level of grand strategy.

The result is a disastrously unsustainable “solution” imposed on Greece, which risks doing fatal damage to that country’s society and political system, and an agreement concerning Ukraine agreed with Putin in Minsk, that Merkel shows no will to honour.

Neither “solution” is going to hold for long. The one involving Ukraine is already falling apart. When each unravels --- as they are bound to do --- Merkel will find she has nowhere left to hide.

As I said previously, this cynical paralysis in place of policy is starting to get noticed even in Germany itself (see again "Angela Merkel - The Empress Without Clothes", Russia Insider, 7th July 2015).

The disastrous EU summit that has just happened in Brussels means that it will now be noticed even more. In political terms perhaps the single most important result of the latest twist in the Greek crisis is the way it has smoked Merkel out.

As for the Russians, the Kremlin has had more detailed dealings with Merkel than anyone else.

Comments Putin and Lavrov have been making show they have no more illusions about her, even if Germany’s importance means they have no alternative for the moment but to continue to deal with her.

Judging from the shambles Merkel has just delivered in Brussels, they might not have to much longer.

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