The Lightning from Greece Strikes Germany

On January 25, the Greek electorate gave a verdict that has raised questions about the survival of the Euro, and even of the European Union (EU). The Greeks voted for a leftist party (Syriza), led by Alexis Tsipras. An acronym for Coalition of the Radical Left, Syriza contested elections first in 2004 and gained only 3.3 per cent of votes. In contrast, in the recent elections, it gained 36 per cent of the vote, capturing 149 seats in the 300-strong parliament. Tsipras has taken over as Prime Minister with the support of a right wing party, the Independent Greeks, which is virulently opposed to the European Union. Syriza and the Independent Greeks have nothing much in common except for their hostility to EU and its harsh treatment of Greece – imposing austerity as the price for the ‘bail out’ in 2010.

The rise of Tsipras is a clear defeat for German Chancellor Angela Merkel who did not promptly send the customary congratulatory message to him. The Chancellor’s office issued a statement sternly reminding Greece that it had to abide by the commitments of the previous Samaris government, commitments which led to the latter’s humiliating defeat. In other words, the message from Berlin is that despite the verdict of the people of Greece the new government is bound to follow the policy of the defeated government.

It is necessary to examine the wisdom of the austerity policy advocated by Germany and, because of Germany, by the EU. The basic approach was that Greece has sinned by living beyond its means and by borrowing beyond its capacity to repay; and, therefore, it should be punished. The Greek government should cut expenditure, sack employees, reduce pensions, and reduce allocations to schools and hospitals. The bailout of $ 270 billion was given by a troika of EU, ECB (European Central Bank) and IMF. The troika thought that they were physicians treating a patient who should have no say in the prescription. It had confidently calculated that the patient will respond to the stiff medication and start recovery by 2012, when the budget would be balanced if interest payments are excluded. Instead, the budget got balanced only by 2014. The prognosis was that unemployment will go up from 9.4 per cent in 2010 to 15 per cent in 2012 and then come down. As a matter of fact, unemployment shot up to 28 per cent by 2014.

What the pundits ignored, only because they wanted to ignore, was the plight of the people who lost all hope. Live births declined by 20,000 during the first three years of austerity. Miscarriages doubled. Married women rushed to brothels but were rejected because legal brothels cannot employ married women; as a result, many took to the streets. Some women doctors doubled up as escorts. 20,000 lost their homes and for them and many others the soup kitchens run by the church and others prevented death by hunger. The policy makers in Brussels, Berlin, and Washington knew all this, but they couldn’t care less. What mattered was balancing of books irrespective of the human cost, and there was no need to change the medication.

Tsipras as candidate had said that if he comes to power he would default on debts. Naturally, as Prime Minister, he has to be more responsible. He has categorically denied any intention to default, but has demanded “a just, viable, mutually beneficial solution.” He has promised to his people a series of measures to reverse the austerity policy. 300,000 new jobs would be created, especially for the young among who half are jobless. The minimum monthly wage would be raised from Euro 580 to 700. Those below the poverty line would get free 300 kWh of electricity and food subsidies.

Would Prime Minister Tsipras be able to deliver on these promises? Where will he find the money? What will be the response of the troika? There are signs that the troika’s solidarity is weakening despite tough statements from Germany. While Merkel was tardy in greeting Tsipras, the French President has invited him to Paris. As a matter of fact, not all in the Eurozone shared Germany’s advocacy of austerity. But, since Germany provides a huge share of the money, the others maintained a respectful silence. Italy and Spain are inclined to be less tough with Greece. Germany can count on support from the Netherlands and Finland, at least for a while.

If Germany does not budge, Greece might default and walk out of the Euro. Pundits in Germany and elsewhere have argued that such a walk out is a desirable outcome. With Greece out, the Eurozone can look forward to good health since the former accounts for only two per cent of the EU. But, sadly, the pundits are going to be proved wrong once again. If Greece defaults and walks out, the EU will be in crisis. Speculators will go for Spain and the EU will not be able to find the money to bail out a large economy such as that of Spain. Moreover, the Spanish government might not agree to austerity. And if it agrees, it will lose the election due in December 2015.

The implications of Germany’s policy failure need careful study. The first ambassador to call on the Greek Prime Minister was the Russian. Tsipras had recently gone to Russia after the annexation of the Crimea. EU solidarity against Russia over Ukraine will be dented. Hungary is not abiding by the sanctions imposed by the EU. Greece will speak out against the policy of sanctions.

Merkel’s worry is that if Tsipras has his way and discards austerity with the concurrence of the troika, in the December 2015 election in Spain, Podemos, a Spanish version of Syriza, will seize power. But the question is whether Germany can persist with a flawed policy?

In conclusion, the EU can survive the lightning stroke from Greece if it responds with reason and prudence. But the answer to the question whether it will survive, is not that clear. There is a chance that Germany, with its mind set of punishing those who live beyond their means, might persist with the flawed policy. Incidentally, there might be a demand from Greece for repayment of a loan that Nazi Germany took from its client government in Greece way back during the Second World War. That loan works out to $11 billion in current terms. Germany has to act with prudence. One of the banners after the declaration of the Greek election results read: Das ist eine wirkliche gute nacht, Frau Merkel (This is a good night to you, Mme Merkel). Tsipras will be attending a EU summit in February. He will be the only one without a tie. Greece has asked for an international conference on its debt, recalling that a similar conference held in London in 1953 wrote off half of Germany’s debt. In the duel between Tsipras and Merkel, the younger leader has a better chance to win.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India

Courtesy:IDSA

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