Time for new approach on Athens austerity

What Germany can do for Greece

Berlin is sticking up for itself as US rhetoric attacking Germany’s trade surpluses intensifies, and as the Greek debt impasse threatens to move from chronic to acute.

Understandably, there has been a marked increase in defensive German comments in the media. Germany feels beleaguered and misunderstood, and is keen to present an alternative interpretation of events.

Germany is agitated over Greece. Against opposition from both the Brussels civil service and the International Monetary Fund, it has shown an intractable line over rescue packages for Athens that have created a harsh and inflexible form of austerity.

This has earned Germany deep dislike from Greece and despair from most economists. It has shown Berlin to be rigid, one-dimensional and quite unable to think of alternative plans. Worst of all, the measures are not working.

The challenge for policy-makers in Berlin is that their ‘tried and trusted’ economic principles, which worked so well during reunification in the 1990s and in their labour reforms of the early 2000s, have simply failed to work in the world of Balkan economics. Greece has not responded like Germany did. Austerity has not made the country leaner and more efficient, merely emaciated.

Germany may claim that unprecedented amounts of Greek debt have been written off – but the packages have also destroyed unprecedented amounts of Greek wealth-producing capacity. In practice, as fast as the EU relieves Greece of debt service burdens, it relieves Greece of the ability to service the debt that remains.

As a result, every German policy-maker knows they will not get their money back. The direct loans to Greece as part of the packages will not be repaid. The indirect loans through Target-2 (the euro area’s real-time gross settlements system) at the European Central Bank are the worst sort of banking arrangement. These loans go out without any date for repayment, without any interest, and are drawable at the borrower’s instigation, not the lender’s. Germany’s Target-2 exposure is over €750bn. This system was never meant to work as an unlimited, perpetual, and free overdraft for borrower nations, though this is what it has become.

German politicians are petrified of the moment when their voters realise this and start asking ‘where is our money?’ When this happens, it will rock the German electorate’s support for the EU. If this happens before September’s federal elections, the eurosceptic and right-wing Alternative for Germany party may become a much more serious force.

What is so damning is that, of all nations, Germany should know that economies with unbearable debt burdens simply cannot earn their way out by ‘trying harder’. Germany could not in the 1920s, and the attempt to do so in the face of unthinking creditors eventually destroyed their currency, economy, democracy and society. Germany couldn’t do so in the early 1950s, and begged their creditors for relief in 1953. It was granted, very reluctantly and only eight years after a vicious war whose scars were still raw, by countries not much better off than Germany. Greece was one of Germany’s main creditors at the time, of all ironies.

Greece has had one year of limited growth after six of deep crisis. This is, in large part, because Europe is finally growing somewhat, rather than because of any home-grown dynamism in the Greek economy. Greek GDP is still 25% below 2010 levels. Gross wages are about 80% of the level they were seven years ago. Unemployment is above 20%, and youth unemployment is kept below 50% only by mass emigration. The average pension is about a quarter below the level of seven years ago, and unemployment pay hardly exists. Investment has completely collapsed, which means that the present slump in output will not be reversed in the near future.

Politicians and policy-makers who pretend that the world is how they would like it to be rather than accept reality seldom finish as victors. But a failure for the German establishment will impact the whole of the EU.

The claim from Berlin is that the existing policy is ‘good for Germany, good for Europe, good for the euro.’ But the mental gymnastics required to justify this statement defeat almost everyone who tries. It is another trilemma – one can have any two of the three, but not all three at the same time. Germany is, maddeningly, advocating more of the same.

John Nugée is a Director of OMFIF and a former Chief Manager of Reserves at the Bank of England.


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