Europe Races To Save Greece

Matt Vespa
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Posted: Jul 07, 2015 8:45 PM
Europe Races To Save Greece

It’s time to get serious, Greece: that appears to be the message France and Germany have towards the Hellenic Republic following a snap referendum that saw 61 percent of Greek voters reject the terms of a new bailout for the debt-ridden country.

In a post-referendum shakeup, Yanis Varoufakis, the Greek Finance Minister, who was described as “combative,” was asked to resign by Prime Minister Alexis Tsipras. The Wall Street Journal  reported that for some months Tsipras had known Varoufakis’ relationship with the other European finance ministers had collapsed.

Germany is the nation that Greece owes the most money regarding the bailout, and they’re not budging. Greece and Germany have a cultural disconnect, as explained in the Bloomberg video that thoroughly explains the European Debt Crisis–and it’s possible detrimental impact on global finances if this situation collapses completely.

As the video demonstrates, Germany is a country whose people work hard, don’t expect much from their government concerning state benefits, and pay their taxes. Moreover, they’re exceptionally frugal, being inflation adverse and not wanting to return to the horrid days of the Weimer Republic. The Greek government actually doesn’t collect the majority of taxes it imposes on its citizens. Additionally, they have a welfare system that is overly generous. No wonder why Germany is holding the line, but they also need to recognize that Greek default isn’t in the best interest of the European Union (via Reuters):

German Chancellor Angela Merkel, who arrived saying there was still no basis for reopening negotiations with Athens, changed her tune in the room and was actively involved in efforts to find a last-ditch solution, euro zone sources said.

Merkel said she expected a formal loan request from Athens on Wednesday and more detail on how Greece would cooperate to make its economy more competitive on Thursday, in order to seek the approval of the German parliament to start negotiations.

"We all share responsibility for the euro," she said of the decision to invite all EU leaders on Sunday - a timetable she said reflected the danger of the situation and the urgent need for a solution.

Short-term finance could also be made available if the Greek government came up with satisfactory proposals and took "prior actions" in passing laws to convince creditors of its intent.

Austrian Chancellor Werner Faymann warned, however, that if there were no deal on Sunday, euro zone governments would have to prepare "Plan B" -- code for Greece losing all access to euros and so finding itself excluded from the currency area.

However, euro zone sources in Brussels said ECB President Mario Draghi had assured finance ministers that the central bank would keep Greek lenders afloat this week as long as negotiations were under way.

Merkel and French President Francois Hollande worked together on a plan to save Greece from plunging into economic turmoil and possibly having to ditch the euro. This involved a medium-term conditional program and a short-term interim financing deal for a few months, the sources said.

Nevertheless, Reuters added that Merkel faces pressure from home to cut Greece loose. Greece, in turn, wants any future negotiations to discuss the possibility of debt relief. Germany isn’t really enthralled by that idea, but some European nations are willing to hear things out, including France (via NYT):

After a six-hour meeting, the leaders of Greece’s five main political parties issued a statement saying they wanted any negotiation to include a discussion of relief from the country’s debt load — a key sticking point with creditors. They are also pushing for immediate help to keep the banks afloat, quick economic aid to tackle unemployment and new bailout money to cover current debt obligations.

In return, they said, Greece would be willing to deliver “credible reforms based on the fair distribution of the burden and the promotion of growth with the smallest possible recessionary impact.”

But the impasse over a bailout threatens to take on bigger dimensions, with implications for European unity.

Germany, the eurozone country to which Greece owes the most money, remained resistant. A spokesman for the Finance Ministry said Berlin saw no new basis for negotiations with Athens at this point. The spokesman for Angela Merkel, Germany’s chancellor, said that while Greece was still in the eurozone, it was up to Athens to determine whether the country would stay.

In France, the finance minister, Michel Sapin, told French radio that while Greece’s vote “resolves nothing,” France could support debt relief for Greece should Mr. Tsipras come forward with a proposal containing “serious” terms for a new bailout package. Mr. Sapin’s remarks came ahead of a meeting set for Monday evening in Paris between President François Hollande of France and Ms. Merkel to discuss how to deal with Greece.

Right now, the deadline for a new proposal from Greece is set for Thursday (via BBC):

The eurozone gives Greece until Thursday to present new proposals to secure a deal with creditors, and has called a full EU summit for Sunday.

The moves came after an emergency eurozone leaders' summit in Brussels.

The eurozone had asked Greece to submit fresh plans after its voters rejected a draft bailout in a referendum.

But Greece brought no written plans, suggesting instead a few changes to an earlier draft, which would respect "the mandate of the referendum".

On Sunday a meeting of all 28 members of the European Union will be held.

German Chancellor Angela Merkel said the eurozone leaders had a "serious, candid discussion" in Brussels that "reflected the seriousness of the situation at hand".

Most Greeks want to remain in the Eurozone, but the problem is that what’s to stop a situation similar to Greece (possibly with Greece falling into financial arrears again) from occurring? Nothing; unless the nations of Europe want to reorganize into a United States of Europe, which would have a central baking authority to prevent Greek-like financial crisis from reaching a critical point. Yet, that would require surrendering a rather large portion of one’s sovereignty over to a central authority, which might make this an onerous task politically. Moreover, if you look back to 2005, the EU didn’t have a lot of success with their treaty proposal aimed at establishing a European Constitution.

For now, Chancellor Merkel is in the driver's seat, according to Politico.  But she has a balancing act to maintain between her hardline stance on Greeks repaying their share and making sure German leadership in this crisis doesn't preside over a Grecian collapse. That could lead to criticism that the country has become too powerful on the continent in addition to providing fiscal solutions that ended in failure. Yet, it seems debt forgiveness might be an unavoidable condition in the wake of the referendum last Sunday: 

Recent polls suggest Germans are split on whether Greece should leave the euro. What they agree on, however, is that Greek government is to blame for the crisis.

A new bailout would also force the question of debt forgiveness back on the table, something Germany has been unwilling to discuss in the past. The International Monetary Fund, in an assessment published last week, warned that the deterioration in the Greek economy was so severe that some form of further debt restructuring was unavoidable.

So not only would Merkel have to sell a new bailout on top of the roughly €245 billion already extended to Athens, but also have to explain to Germans why they need to take further write downs on what they are owed.

For Merkel, the other options are no more appealing. Letting Greece crash out of the euro in the wake of the public’s renunciation of German-sponsored austerity would open Berlin to accusations that it has become too dominant in Europe and that its prescriptions have failed.