Greece was diagnosed as critically insolvent a year ago. It was placed in the eurozone’s intensive care ward, treated with an infusion of 110 billion euros (US$158 billion) and put on a crash diet to thin its bloated state sector. However, 12 months later, the patient is getting sicker.
The budget deficit, at 10.5 percent, is 1.1 percent more than projected. A promised 50 billion euro privatization program is stalling. Tax collection is notional. Recession is deepening. The national debt has grown to 340 billion euros — 18 months of Greek GDP. The rates Athens has to pay to borrow on the bond markets are off the affordability scale. The prospect is of a long vicious circle of recession and deflation that offers no escape from the debt trap.
If this is the cure, the Greeks are telling their eurozone peers, we prefer to take our chances with the disease.
The doctors in Berlin take a dim view of that. They might sugar the pill with another 30 billion euros or so to tide Greece through next year and spare it the pain of the bond markets.
They might also agree to a “soft restructuring” by swapping debt for longer-term, lower-interest loans.
However, they will agree to this only if the medicine is stronger and the Greeks promise to take it all.
The differences between Athens and Berlin — economic, social, political and cultural — have been stark throughout the euro’s troubles. That they have not narrowed is clear from a weekend of high farce and panic surrounding a not-so-secret conclave in a Luxembourg Schloss.
“Ham-fisted, unbelievable. This is how you manage the euro crisis?” a European diplomat said of Friday’s meeting.
A small circle of finance ministers, central bankers and Brussels officials failed to settle what to do about Greece and only laid bare more divisions.
A year ago, both poles in the debate produced intense and ugly exchanges. The German press suggested Greece sell Germany its islands or flog off the Parthenon. The Greek government responded that it was about time to revisit the question of World War II reparations.
Athens and Berlin are at it again amid lurid allegations of Greek plots to return to the drachma, triggering a run on the Greek banks and Europe’s own Lehman’s moment,
“Borderline criminal,” Greek Prime Minister George Papandreou said of German government leaks to the German news magazine Der Spiegel about the Luxembourg meeting.
A top German economist, Hans-Werner Sinn, said his weekend suggestion that Greece should be kicked out of the euro was “the lesser evil.”
It is patently clear that Athens will not be able to meet the terms of the 110 billion euro bailout agreed last year. They were largely scripted in Berlin and include getting its deficit down to 3 percent by 2014 and being fit enough by next year to return to the markets to fund its borrowing requirements — up to 30 billion euros next year.
The issue is what to do about it, which leads on to the question: What does Germany want?
For weeks, top German officials have been leaking discreetly, planting controversial ideas in the public sphere only for the government to row back when the media went berserk.
A Greek restructuring would not be a disaster, said Werner Hoyer, Germany’s Europe minister — followed by denials that such a move was being considered.
The weekend leak to Der Spiegel would appear to fit this template. Reports the Greeks were to quit the euro went viral in Germany, as elsewhere. German Chancellor Angela Merkel’s spokesman duly rubbished them.