Will Gray: Germany to Greece: Drop Dead
[Will Gray is an associate professor of history at Purdue University in West Lafayette, Indiana.]
Like New York City in the 1970s, the government in Athens today stands on the brink of defaulting. The numbers are sobering: Greece’s budget deficit tops 12% of GDP, and the government owes €20.5 billion ($27.8 billion) in debt service payments between now and the end of May 2010. The Greek government under Prime Minister George Papandreou badly needs to restructure the debt in connection with its new, ambitious austerity program, which aims – desperately and implausibly – to bring the budget deficit down to 8.7% within the year. As with any mortgage holder seeking to refinance a loan, Greece would enjoy better terms if it could count on comfortably situated co-signatories. But thus far, Greece’s European partners have remained tight-lipped.
The response from Germany has been particularly self-righteous. Commentators depict the Greek crisis as the lamentable consequence of wasteful spending; exhibit “A” is the absurdly generous pensions system down in Hellas. The mood in Frankfurt has soured further in the face of revelations that earlier Greek governments conspired – with the help of Goldman Sachs – to hide the true fiscal situation from the European Central Bank. The verdict of Focus magazine was clear from the title story of February 22, 2010: “Fraudsters in the Euro-Family. Will Greece cost us our money?” This was accompanied by a crude image of Venus de Milo giving the finger to Europe....
For the time being, Angela Merkel’s Germany has pledged not to give “one cent” toward alleviating Greece’s plight. Such responses have a long tradition in the Federal Republic, dating back to the heyday of the West German economic miracle. To most Germans, then and now, trade surpluses were evidence of hard work and thrift, while trade deficits were a sure sign of laziness and moral decay. Writing “blank checks” to support Europe’s weaker economies could only invert this moral order, punishing virtue and rewarding vice. Recognizing that a collapse of Italy or Britain – the weaklings of the 1970s – would bring disaster to all of Europe, Chancellor Helmut Schmidt searched for creative ways to assist these countries without putting German taxpayers directly at risk. (Typically, this involved promoting action by the Bundesbank or the IMF.)...
The Germans have made a clear macroeconomic choice in the past decade. By holding down wages and working until age 67, they have improved their competitive position significantly – thus allowing the retention of jobs. Germans have, in short, chosen to work; Greeks have chosen leisure. With short working hours, early retirement, and a bloated state sector, Greeks can only enjoy a high-consumption lifestyle thanks to the stability of the Euro. By keeping interest rates down, the European currency has enabled Mediterranean countries to import huge volumes of goods from Germany. Greeks are, in effect, enjoying time off that Germans have denied themselves....
If European leaders, finance ministers, and central bankers cannot plausibly demonstrate a commitment to a single economic area, speculators may indeed bring down the Euro crashing down. So far, the effects of this winter’s crisis have been mild – a downward correction in the currency’s value that was needed anyway. But the Germans’ evident unwillingness to accept the full implications of the currency union must surely plant a seed of doubt in the minds anyone holding large quantities of Euros. Failure by Germany to signal an appropriate, and self-evident, degree of solidarity for their fellow Europeans in Greece could well throw the whole basis of the common currency into question.
This is why the prospect of IMF assistance to Greece is viewed warily by officials in Europe. In recent months, IMF stabilization packages have helped Hungary and Latvia tiptoe back from the brink. But those two countries were not members of the currency union. If the Europeans have to rely upon the IMF to sort out the problems in Greece, they will be abdicating responsibility and, in effect, demonstrating the insubstantial political basis of the common currency. One can only hope that Germans will come to take a broader view of the existing interrelationships between center and periphery in Europe. Back in 1975, President Gerald Ford endorsed federal support for New York City’s financial recovery – just weeks after telling the City, in effect, to “drop dead.”...
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Like New York City in the 1970s, the government in Athens today stands on the brink of defaulting. The numbers are sobering: Greece’s budget deficit tops 12% of GDP, and the government owes €20.5 billion ($27.8 billion) in debt service payments between now and the end of May 2010. The Greek government under Prime Minister George Papandreou badly needs to restructure the debt in connection with its new, ambitious austerity program, which aims – desperately and implausibly – to bring the budget deficit down to 8.7% within the year. As with any mortgage holder seeking to refinance a loan, Greece would enjoy better terms if it could count on comfortably situated co-signatories. But thus far, Greece’s European partners have remained tight-lipped.
The response from Germany has been particularly self-righteous. Commentators depict the Greek crisis as the lamentable consequence of wasteful spending; exhibit “A” is the absurdly generous pensions system down in Hellas. The mood in Frankfurt has soured further in the face of revelations that earlier Greek governments conspired – with the help of Goldman Sachs – to hide the true fiscal situation from the European Central Bank. The verdict of Focus magazine was clear from the title story of February 22, 2010: “Fraudsters in the Euro-Family. Will Greece cost us our money?” This was accompanied by a crude image of Venus de Milo giving the finger to Europe....
For the time being, Angela Merkel’s Germany has pledged not to give “one cent” toward alleviating Greece’s plight. Such responses have a long tradition in the Federal Republic, dating back to the heyday of the West German economic miracle. To most Germans, then and now, trade surpluses were evidence of hard work and thrift, while trade deficits were a sure sign of laziness and moral decay. Writing “blank checks” to support Europe’s weaker economies could only invert this moral order, punishing virtue and rewarding vice. Recognizing that a collapse of Italy or Britain – the weaklings of the 1970s – would bring disaster to all of Europe, Chancellor Helmut Schmidt searched for creative ways to assist these countries without putting German taxpayers directly at risk. (Typically, this involved promoting action by the Bundesbank or the IMF.)...
The Germans have made a clear macroeconomic choice in the past decade. By holding down wages and working until age 67, they have improved their competitive position significantly – thus allowing the retention of jobs. Germans have, in short, chosen to work; Greeks have chosen leisure. With short working hours, early retirement, and a bloated state sector, Greeks can only enjoy a high-consumption lifestyle thanks to the stability of the Euro. By keeping interest rates down, the European currency has enabled Mediterranean countries to import huge volumes of goods from Germany. Greeks are, in effect, enjoying time off that Germans have denied themselves....
If European leaders, finance ministers, and central bankers cannot plausibly demonstrate a commitment to a single economic area, speculators may indeed bring down the Euro crashing down. So far, the effects of this winter’s crisis have been mild – a downward correction in the currency’s value that was needed anyway. But the Germans’ evident unwillingness to accept the full implications of the currency union must surely plant a seed of doubt in the minds anyone holding large quantities of Euros. Failure by Germany to signal an appropriate, and self-evident, degree of solidarity for their fellow Europeans in Greece could well throw the whole basis of the common currency into question.
This is why the prospect of IMF assistance to Greece is viewed warily by officials in Europe. In recent months, IMF stabilization packages have helped Hungary and Latvia tiptoe back from the brink. But those two countries were not members of the currency union. If the Europeans have to rely upon the IMF to sort out the problems in Greece, they will be abdicating responsibility and, in effect, demonstrating the insubstantial political basis of the common currency. One can only hope that Germans will come to take a broader view of the existing interrelationships between center and periphery in Europe. Back in 1975, President Gerald Ford endorsed federal support for New York City’s financial recovery – just weeks after telling the City, in effect, to “drop dead.”...