20 July 2015

17 July 2015 

A vote in the Greek parliament means little to Germany’s finance minister,Wolfgang Schäuble. The self-appointed guardian of the EU’s financial rulebook says Athens can vote as many times as it likes in favour of a deal that promises, even in the vaguest terms, to write off some of its colossal debts, but that doesn’t mean the rules allow it.

In fact, as Schäuble delights in pointing out, any attempt at striking out Greek debt is, according to his advice, illegal. Yet Schäuble knows Greece’s debts are unsustainable unless some of them are written off – he has said as much on several occasions. So faced with its internal contradictions, he posits that the deal must fail and the poorly led Greeks exit the euro.

As a compromise, he repeated his suggestion on Tuesday that Greece leave the euro temporarily. Those who care more for maintaining the current euro currency bloc as a 19-member entity immediately spotted this manoeuvre as a one-way ticket with no way back for Greece. The Austrian chancellor, Werner Faymann, a centre-left social democrat, said Schäuble was “totally wrong” to create the impression that “it may be useful for us if Greece falls out of the currency union, that maybe we pay less that way”.

Faymann, who has consistently taken a sympathetic line on Greece, showed his growing irritation at the German minister’s stance: “It’s morally not right, that would be the beginning of a process of decay ... Germany has taken on a leading role here in Europe and in this case not a positive one.”

Greece and Faymann’s problem is that there are plenty of other forces at playpulling at the loose threads of the latest bailout deal. The International Monetary Fund (IMF) has said a big debt write-off is needed to prevent a proposed €86bn (£60bn) deal collapsing under the sheer weight of future liabilities and a reluctance in Greece to carry through reforms.

Optimists argue that a debt write-off can take many forms, getting round Schäuble’s legal restrictions

Even Greeks admit that a deal could fall apart once IMF inspectors arrive and detect backsliding on spending cuts and privatisation plans. Optimists argue that a debt write-off can take many forms, getting round Schäuble’s legal restrictions. Under the previous bailout, Greece was due to pay back loans from the IMF and ECB in the first few years of its programme but delay the bulk of repayment to Europe’s stability fund until 2023. That date could be pushed to 2040 or beyond.

A delay is the same as a write-off because all the time a country is not paying its debts, its economy is getting bigger and stronger and better able to pay the debt. Inflation also means the debt is worth less and easier to afford. And the debts, much of which are just guarantees of Greek bank assets that will recover most of their value over time, are probably not needed anyway.

This is not a message that Schäuble or the German parliament wants to hear. Sadly, many of the Bundestag’s finest are still in a mindset where debt-financing heralds hyperinflation. For a nation obsessed with saving for old age, inflation is a real calamity. What they can’t seem to understand is that Europe needs a little inflation and if there is too much, plenty of tools exist to bring it under control.

No comments: