Merkel in Trouble: Greek Debt, the EU, and Politics

Article excerpt

From when it first became apparent to the international community that Greece would have trouble honoring its considerable national debt, after running a 13.6% budget deficit last year, talk emerged of the plausibility of a bailout. Bond yields had spiked, with the 30-day benchmark rate rising to a substantial 6.09 percent by February. Even the stop-gap measure of Greece issuing more short term debt in order to satisfy impending obligations and buying time before fiscally restructuring seemed infeasible. In Greece, workers and labor unions balked at Prime Minister George Papandreou's drive to bring the budget under control, protesting viciously his proposed measures to cut the deficit to the European Union's requirement of 3 percent of GDP. It became clear that Greece could not solve its own problems; somebody else had to help out.

Since Greece's default threatened to undermine the viability of the European Monetary Union, a consolidated union of advanced European states that share a common currency which could devalue in the event of a Greek default, the European Union was seen as the most likely candidate to help Greece deal with its woes. Many talked of the International Monetary Fund's rescuing Greece, but given that the IMF generally dealt with nations as a lender of last resort, this idea made some uneasy. After all, Greece had a potential lender, the EU. What has emerged is a hybrid EU-IMF package of about US$56 billion.

Estimates vary as to how much that bailout would cost Germany, the most well-off member of the EU and its largest economy. Some place the cost at around $20 billion. Others estimate double that amount. Whatever the cost, Germans are extremely unhappy with it; between 70 to 80 percent of Germans are opposed to any form of Greek bailout. Thanks to the general discontent that the Greek situation has prompted, Chancellor Angela Merkel's political fortunes have become unfairly imperiled.

Merkel has approached any idea of a bailout with extreme caution and skepticism. From the beginning of this year, when talks of a bailout first began, she stressed it only as a last resort. More recently, while the IMF, France, and the White House have pledged to move quickly and inject funds into Greece as soon as possible, Merkel has said that the bailout should only occur in the event that a serious challenge to the Euro, the EU's common currency, was posed. As facts stand, the Euro is at considerable risk. In just one day, on April 15, backed by worries about Greece's ability to repay its debts, the Euro fell 0.6 percent relative to the dollar and 0.8 percent relative to the yen, both currencies of countries that also face high debt concerns, although where default is not necessarily a short-term issue. Merkel has also indicated that any bailout for the European Union would be under close monitoring and highly stringent conditions, highlighting her unwillingness to liberally grant funds to the struggling nation of Greece. …