Germany will relent on Greek debt – and Europe will suffer

Josef Joffe Tuesday 27 January 2015

Alexis Tsipras has inflicted another defeat on Berlin. Merkel is no longer Empress Angela, and the real problems await in France and Italy

Alexis Tsipras bows to officials and journalists after his swearing-in as prime minister at the Presidential Palace in Athens. Photograph: Yannis Kolesidis/EPA

So Alex the Greek won, and the euro lost. Not quite. In fact, the bulk of euro land – the “Club Med” countries plus the mainstream left – are quietly triumphant. The southern tier and Europe’s social democratic parties never liked the diktat of the Germans, who have been cracking the whip of fiscal discipline and market-oriented reforms since the great crash of 2008. For years they have all preached cheap money and unfettered deficit spending.

Now Berlin’s critics feel vindicated and emboldened by the victory of Greece’s far-out left (Syriza), which will form a government with the equally radical right (Independent Greeks). Athens, so they calculate, will finally break Angela Merkel’s stranglehold, her fingers already pried loose by Mario Draghi when the European Central Bank opened the flood gates of quantitative easing, which will gush forth masses of money at the lowest rates in history.

Gianni Pittella, the leader of the social democratic caucus in the European parliament, is cheering. Renegotiating the Greek debt – read: forgiving part of it – should no longer be a “taboo”. The EU commission has signalled its readiness to negotiate. Germany’s Greens are pushing for a “haircut”.

The long faces belong to the usual suspects: Merkel’s Christian Democrats and her hard line point man on the ECB board, Jens Weidmann. Let’s tally up the score. Berlin has lost two rounds now, last week against Draghi, this week against Alexis Tsipras. Whatever happened to “Empress Angela”, for years feted as the heir of Charlemagne and Europe’s most powerful leader?

The problem of Germany and a dwindling “Club North” is not so much Greeks clamouring for gifts, but the rest, especially the big two of France and Italy, with Spain a half-reformist number three. Paris and Rome are loth to do what the economic logic of monetary union demands. If you can no longer devalue on the outside to stay competitive, you have to “devalue” on the inside by lowering wages, spending and market barriers at home. They’ve proven unable to outmanoeuvre their nations’ powerful privileged interest groups.

Now hope springs anew. If the German chancellor yields to Athens, how can she refuse to ease up on Paris and Rome? Also, why reform and court electoral disaster when Draghi, the ECB chief, has already engineered a massive devaluation of the euro that promises a welcome, though illusionary, surge in competitiveness on the global market?

Tsipras’s Greece is a problem postponed, not solved. As always when disaster strikes, politicos seek solace by celebrating the silver lining. Don’t worry, so the line goes, Tsipras was just posturing when he threatened default and promised to rehire government workers, raise wages and pensions, and open the spigot of public spending. Now that he is elected, the rosy view has it, the firebrand will act the statesman. In exchange for relief from the Troika – of the IMF, EU and ECB – he’ll just throw a few sops to his constituencies and then angle back to the path of fiscal and reformist virtue.

The soothing lore continues. Did not Bill Clinton and Germany’s Gerhard Schröder demonstrate with their welfare and labour market reforms that pain is best inflicted by the left? The analogy does not wash. Tsipras has decided to get into bed with the right-wing Independent Greeks, a party that shares none of Syriza’s ideological convictions, save two: contempt for fiscal probity, and resentment of Europe.

With the far-right breathing down his neck, how will Tspiras change his colours, especially since the coalition represents not only the anti-reformist consensus of the country, but also a slew of deeply entrenched special interests such as public unions and sheltered industries? Let him move against Greece’s vast state sector, its patronage networks and its anti-competitive regulations, and he’ll court a coalition break-up from day one. So on the road to Brussels, don’t count on Saul turning into Paul, let alone on the government’s longevity.

The bottom line is this: Greece will not bolt from the euro, and the other 18 won’t force a “Grexit” – not even Merkel, though she is being depicted as Hitler, with Germany as an “occupying power” that, according to Tsipras, should pay vast restitution for the cruel real thing back in the 1940s. So the Greek debt will be rescheduled and a chunk of it forgiven, together with a fourth rescue package for Athens.

The upside: Europe can afford to keep bailing out a tiny economy like Greece’s. It is peanuts, or rather olives. The more serious downside is the bad example. France, Italy et al can now invoke this new Greek revolt and warn Berlin: “You see what you reaped with your Teutonic insistence on austerity and market reforms? You lost the reasonable Conservatives under Antonis Samaras and brought to power those wild-eyed populists of the far right and left. Relent, or you will get their anti-European soul mates in France and Italy – Marine Le Pen and Beppo Grillo.”

The bet is that Merkel will relent – and that Europe will not thrive on a diet of cheap money, deficit spending and devaluation, not in the absence of painful pro-competitive reforms. The long-term data tells a sombre story. Since the heady 1970s, EU average growth has fallen by three-quarters of a point, decade after decade. Greece is just the headlines; the real drama is Europe’s slow, almost imperceptible decline. Up on Mount Olympus, the Gods may be weeping.

Germany will relent on Greek debt – and Europe will suffer | Josef Joffe | Comment is free | The Guardian