Germany and Greece: Wolfgang's woes

Feb 20th 2012, 22:47 by The Economist | Brussels

WOLFGANG Schäuble is, in many ways, the strongest – perhaps even the last – Europhile in the German government. But open the pages of Greek newspapers and there he is, the German finance minister depicted in Nazi uniform. It is not just the inflammatory Greek press that dislikes him. The Greek president, Karolos Papoulias, lashed out at him last week: “Who is Mr Schäuble to insult Greece? Who are the Dutch? Who are the Finnish?”

Mr Schäuble is, first and foremost, the German finance minister. As such his job is to protect the interests of the German tax-payer, from both the demands of his fellow ministers and the begging bowl held out by his European colleagues. As creditor-in-chief, one would expect him to be toughest in imposing conditions on Greece before granting a second bail-out.

But the Schäuble problem goes beyond this necessary parsimoniousness. Consistently through the crisis, Mr Schäuble has adopted the hardest positions. First it was a papercirculated by his officials calling for the creation of a budget “commissar” with the power to control the Greek budget. Then it was his open talk a Greek default, and the fact that other European countries were “better prepared” to withstand it. Most recently, he suggested that Greece should postpone its elections so that the technocratic government of Lukas Papademos has more time to implement reforms.

Many think Mr Schäuble has been deliberately pushing the Greeks into a chaotic default (one example is here).  Even so, why do it so overtly? Why invite the crude and simplistic accusation the modern Germany is repeating the Nazis’ jackbooted occupation of Greece? It would be so much simpler to let somebody like the Dutch finance minister, Jan Kees de Jager, do the tough talking (see my previous post) while Germany holds back. Every finance minister of a creditor country must demonstrate that he (or she) is driving a hard bargain. Mr Schäuble knows better than most the many doubts that surround even a second vast bailout of Greece (see this report of the IMF's assessment).  In the end, Mr de Jager’s menaces count for much less than Mr Schäuble’s; if Greece is to be cut loose the decision will be taken in Berlin, not The Hague.

The FT's Quentin Peel recently recently had an interesting piece on the reasons for Germany's rigidity:

Postwar Germany is both profoundly provincial and committed to Europe. The federal system keeps central government in check, locked into a system of coalition government that is consensual and slow-moving. Both politics and the bureaucracy are dominated by lawyers (Mr Schäuble is one) who believe passionately in the need for rules and respect for the law. It makes for a confusing mixture of compromise and inflexibility. Mixed messages emerge from the different centres of power, not least from the finance ministry and the chancellor’s office, until they can agree a common line.

Some argue that Mr Schäuble’s very pro-Europeanism heightens his sense of betrayal by Greece, and the prospect that it could destroy the European Union’s greatest experiment in integration. There may be truth in this. But I cannot help but feel that that also something of the bad-cop routine in Mr Schäuble’s actions. He must act as if a Greek default is possible, even desirable, in order to turn the pressure on Greek politicians. If that means being portrayed as a Nazi, so be it; the alternative is to let Greek politicians think they are immune because the euro zone will never let them collapse.

Still, Mr Schäuble's claim that the euro zone is ready for a Greek default sounds implausible. Last year European politicians were bending over backwards to avoid any sort of default, lest it destabilise the whole of the euro zone. Yes, the European Central Bank’s massive liquidity programme for banks (not sovereigns) has taken the edge off the panic. The reforms being enacted in Italy and Spain have helped too.

But nobody thinks the euro zone has yet overcome the crisis. If it were otherwise, why insist on the fiction that the restructuring of private debt is “voluntary” simply to avoid triggering credit-default swaps? And surely, if Germany were serious about cutting off the Greeks it would be doing more to strengthen anti-contagion measures. On the contrary: Germany has so far resisted a proposal to strengthen the rescue fund by maintaining the temporary European Financial Stability Facility (EFSF) even after the creation of permanent European Stability Mechanism due later this year.

The conundrum for the fiscal hawks is that issuing a credible threat to Greece requires issuing a credible guarantee that Italy and Spain would be protected from the consequences. But that is something that Germany will not do, for fear of reducing the reformist pressure on Italy and Spain. So through gritted teeth, Greece must be kept afloat in some manner—not at any cost, of course, but for some time yet, as long as the price is not too exorbitant. “We continue to believe that Greece can be saved. Or at least we continue to say so,” says one Eurocrat.

The difficulty in imposing discipline and reform on Greece will be familiar to any parent of recalcitrant adolescents who do not want to do their homework. Dad may shout, cajole and threat; the kid may come to hate the parent. But if the kid refuses to study, he cannot be starved, beaten or thrown on to the streets. The parent may enjoy the illusion of infinite power, but authority ultimately involves much bluff.

http://www.economist.com/blogs/charlemagne/2012/02/germany-and-greece