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A Chancellor pressed on all sides

A Chancellor pressed on all sides

Faced with Greek obduracy, Merkel can’t be too generous

by David Marsh

Fri 8 Jan 2016

For several years, a semi-permanent American criticism of Germany in the monetary and economic sphere has been that Europe’s largest economy is not living up to its potential. At the beginning of what promises to be a bruising year for Chancellor Angela Merkel, the reality may be starting to sink in. At least in its efforts to resolve the festering problems within the euro area, Germany has reached the limits of that potential.

From now on, particularly as far as difficulties with Europe’s debt-strapped Mediterranean countries are concerned, the road for the German chancellor, and for Europe, will be getting steeper and thornier.

Greece has been off investors’ radar screens for the past few months following last summer’s agreement on a €86bn bail-out package. But indications from Athens over the Christmas period have been that the Greek imbroglio will soon return as a force for drama and doubt.

Greek Prime Minister Alexis Tsipras has thrown down the gauntlet to creditors by saying he would rather the IMF did not participate in the loan plan, diametrically opposing Germany’s wishes. Berlin wants to keep the Fund on board to stop the European Commission’s desire to keep Greece afloat from overly influencing European governmental creditors. This is precisely why Tsipras wants the Fund to leave the field.

Tsipras’ recommendation is somewhat incongruous. The IMF has been at the vanguard of calls for Greek debt relief as a condition for further participation in Greek credits.

Berlin will continue to reject debt relief (effected not by a formal write-down but by a vast stretching out of maturities on new and existing debt until well into the second half of the century) until Athens shows clear progress in meeting reform and restructuring targets. Given Europe’s generally sluggish growth environment, the prospect of good news on these issues in the coming months has been fast receding.

On the other hand, Tsipras may reckon that the IMF’s debt relief suggestion is unlikely to be politically feasible. By making the Fund a scapegoat in inevitable wrangling with creditors over issues such as cuts to Greek pensions, he may be gambling on winning valuable domestic support while his room for political manoeuvre is shrinking.

Faced with obduracy from Greece, Merkel has few options. She cannot unleash a euro ‘bazooka’ to help ailing states in the way British Prime Minister David Cameron or Tim Geithner, the former US treasury secretary, once favoured. All her ammunition has been used up. Wolfgang Schäuble, her acerbic and occasionally mutinous finance minister, has already stated his desire for Greece to be given a temporary ‘exit’ – a departure he no doubt believes could last quite a long time.

Merkel might be happier if Spain and Portugal were more stable, rather than languishing in the political doldrums following a leftward swing in elections in November and December. In Spain, Mariano Rajoy’s centre-right Popular Party emerged as the largest party last month but lost its parliamentary majority, leaving no clear-cut candidate for its next coalition partner and Spain in political limbo. This despite 3% annual economic growth, which has comprehensively outstripped that in most of the rest of the single currency area.

Politically weakened by domestic political fall-out over refugees, Merkel is in no position to lead a campaign in Germany for positive treatment of Greece. If Athens left the euro and introduced a devalued drachma over the coming year, geopolitical sensitivities might persuade Germany, the US and other leading powers to treat Greece far more favourably outside the euro than within.

David Marsh is Managing Director at OMFIF.

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