Germany's Domestic Politics Complicate the Greek Debt Crisis

Greece has been in economic recession since 2010. Responsibility for Greece’s financial difficulties stems from a combination of an enlarged public sector in the 1980s and 1990s, Greek government spending that was financed by high borrowing, and fiscal figures that did not comply with the Eurozone’s rules of admission, as findings from a 2004 Eurostat report suggest.

Plans for recovery came as a series of bailouts. The basic components of Greece’s bailouts have included the following: mandatory austerity packages, a series of loan installments to Greece and debt repayments from Greece to be made on strict deadlines. The most recent bailout plan is underway and scheduled to conclude in 2018, with additional plans being made for 2019 and 2020.

These bailout programs have proven problematic for two reasons: the absence of debt relief and substantial austerity demands. Greece’s creditors, led by Germany, its Chancellor Angela Merkel and her Christian Democratic Union (CDU), push austerity in exchange for loan disbursements. These austerity measures reduce social spending, and as a result, healthcare, education, social services, welfare and pensions face significant budget reductions.

Wages and jobs across the public sector have also been reduced, and overall, the Greek government is ill equipped to respond to the needs of its most vulnerable. Consequently, more Greeks face hunger and poverty, and a quarter of the population is without healthcare (the latter is one of the sectors hit hardest by austerity, with budget reductions of about 50 percent). Alongside cuts in pay and services comes increased taxation, notably the Value Added Tax (VAT), which also affects small businesses including stores and hotels, which are crucial to Greece’s largest industry: tourism.

Greece’s former Finance Minister, Yanis Varoufakis, was among the most vocal opponents of the austerity-driven bailout. Varoufakis argued as early as 2015 that Greece was already insolvent and that an austerity-based bailout without any prospect of debt relief would only keep Greece indebted. That same year, 61.3 percent of Greeks voted against continuing austerity in a summer referendum. Despite the referendum results, Greek Prime Minister Alexis Tsipras promised the creditors that he would continue austerity.

This remains the case today. On May 2, Greece reached a preliminary agreement with its creditors for further austerity, namely, approving fiscal cuts equal to 2 percent of GDP. Still, debt relief remains elusive, despite the International Monetary Fund’s (IMF) claims that it is the only possible solution for Greece to make its debt sustainable and, thus, attain long-term financial stability.

Germany’s Finance Ministry has persistently refused this option, arguing that awarding debt relief would set a dangerous precedent. Meanwhile, it called the preliminary agreement for fiscal cuts an “important intermediate step” before debt relief can be discussed. Indeed, it is a next step insomuch as it is now likely that Greece will secure a loan installment that would allow it to make the next debt repayment in July. Without this repayment, any prospect of debt relief approval from her creditors would be unlikely. However, in order for debt relief to even be considered, Greece – under pressure from its creditors, led by Germany – must make fiscal concessions, burdening the Greek people and jeopardizing Greece’s chances of sustainable growth.

In light of this, the motivations behind the German leadership’s role in bailout negotiations should not go without scrutiny. Varoufakis argued in 2015 that the German Finance Minister, Wolfgang Schäuble, favored a draconian bailout without the prospect of debt relief, and that Schäuble and his CDU party were using the Greek debt crisis to advance party interests. Despite the possibility of future debt relief consideration, the CDU’s current stance is really no different from since the Greek debt crisis began. Thus, Varoufakis’ general question of “why” is still valid, and interestingly, there are identifiable political and fiscal interests for Germany’s CDU in maintaining its stance.

In early 2017, the IMF’s chief, Christine Lagarde, claimed that the bailout stipulations favored by the CDU and its Eurogroup partners would perpetuate a “never-ending cycle of indebtedness.” This conclusion was reached on two accounts. First, Schäuble insisted that Greece achieve an annual 3.5 percent fiscal surplus beginning in 2018. The IMF stated that the budget cuts needed for a 3.5 percent target would slow down the progress of Greek fiscal reforms and thereby slow Greek economic growth. This was largely based on the projection of the IMF’s Staff Report findings, which state that Greece’s debt is still too high to sustain, now about 178 percent of GDP.

Second, the CDU-backed austerity-driven bailout lacked “substantial debt relief”, without which, the IMF maintained, Greece could not recover. Substantial debt relief, with more modest fiscal targets, would make implementing new structural reforms more sustainable and alleviate the stresses of austerity on the Greek people. According to Jeffrey Sachs, this is not simply an IMF opinion, but rather a need that is “ubiquitously acknowledged” by academics and policymakers as the key to repairing Greece’s crisis.

Still, Schäuble refuses to acknowledge debt relief as a necessary bailout component. Instead, he hinted that Greece might have to leave the Eurozone altogether. Responding to the July 2015 referendum, Schäuble stated that Greece might have to “take a break” from the monetary union. In 2016, Tsipras deviated from the CDU’s austerity demands by agreeing to award Christmas bonuses and refusing to increase the Value Added Tax in Aegean islands that have been most affected by the migrant crisis. ARD’s Bericht aus Berlin recorded Schäuble’s response that if Greece could not take the “pressure” then it “couldn’t stay in the currency union.” Both responses had the trappings of an ultimatum that if Greece did not meet the CDU’s austerity demands in full, it would be forced out of the single currency.

It is inconclusive whether the above two ‘Grexit’ threats indicate a CDU-wide desire to expel Greece from the Eurozone. Varoufakis believed that Schäuble intended to force Greece out of the Eurozone so that other Eurozone countries, like France, would “accept his model of a “disciplinarian Eurozone.” It is highly unlikely that Germany would seek to expel a member state, because doing so could underline a weakness in the Eurozone’s ability to manage fiscal challenges, and because there are also many German policymakers that vocally support Greece’s Eurozone membership, perhaps most notably among the Social Democrats, which also advocates for Greek debt relief.

That said, Schäuble’s apparent ‘Grexit’ threats make somewhat more sense, when viewed in the context of what the CDU stands to gain from the Greek debt crisis – and may also explain why the CDU has consistently rejected calls for Greek debt relief and seeks the continuation of austerity measures in the preliminary May deal.

First, the German public sector and the CDU have a fiscal interest in a crisis-stricken Greece. A 2015 German study by IWH found that keeping a crisis-stricken Greece in the Eurozone helped Germany’s public sector finances. The IWH report suggests that this is because “investors disproportionately” sought safer investments during “crisis times” in non-crisis areas like Germany. Interestingly, yields from German bonds decreased when Greece was under threat of leaving the Euro.

The IWH report estimates that it was in this way that Germany saved around €100 billion in interest expenses during the crisis years of 2010-2015 (an amount that exceeded the €90 billion in debt that Greece owed Germany at that time). If the Greek crisis “calmed down,” then Germany “would no longer be able to issue debt at depressed rates.” In this sense, prolonged doubt over Greece’s ability to remain in the Eurozone and its fiscal stability has, and could continue, to make money for Germany. Further austerity, which is unpopular and unsustainable without debt relief, adds to the uncertainty over Greece’s fiscal stability because of the fiscal, political and social stresses it creates.

The CDU was Germany’s ruling party during the crisis years of 2010-2015, with Merkel as Chancellor and Schäuble as Finance Minister. It is Schäuble’s pro-austerity fiscal policies during those years that can, in light of the IWH study, be credited with the German public sector’s profits. The implementation of the most recent “intermediate” fiscal demands actually continue to delay long-term progress toward stabilizing Greece’s finances, because they make debt relief discussion an ambiguous reward for compliance rather than a priority. It is not unreasonable to predict that German public sector finances could again benefit as they did in 2010-2015, with the CDU able to take credit once more.

Second, there are domestic political interests at stake for the CDU. In Germany, the CDU faces reinvigorated competition in the upcoming September elections from its pro-debt relief opposition, Martin Schultz’s Social Democrats. If the CDU continues to promote policies that are known to make money for Germany, the party may gain more support. Furthermore, the CDU could also harness the support of more conservative Germans who favor austerity or who also disagree with Greek debt relief, and from more radical-leaning Germans who want a ‘Grexit’. In this way, the CDU does not have to necessarily pursue a ‘Grexit’, but still has the potential to gain broader voter support if it can demonstrate a hardline stance toward Greece.

Of course, it is impossible to claim to know the full motivations driving the CDU’s stewardship of the Greek debt crisis. However, its unwillingness to pursue a less punitive, more effective fiscal recovery does give reason to question the CDU’s policy preferences. If the CDU really is using the Greek debt crisis to advance its own interests, it would not be the first time that something like this has happened in Greece. Two notable examples occurred in the nineteenth century, namely, in 1856 and 1897. In both instances, European powers (first, France and Britain; and then Germany) established financial commissions in Athens that served to thwart Greek foreign policy goals that opposed Western Europe’s political and economic interests in the Eastern Mediterranean. Greek history, then, justifies some wariness in dealing with Western Europe’s traditional power brokers.

More recently, the signing of the Rome Declaration on March 25 this year served to highlight enduring questions regarding European “solidarity” and the single currency zone. The signing was intended as a reaffirmation of the EU’s commitment to a unified Europe, with “common institutions and values, [which would uphold] the rule of law.” But the challenges of Middle Eastern migration and ‘Brexit’ have weighed heavily on the union, and some Europeans believe that the European bloc’s monetary apparatus, the Eurozone, benefits some partners while leaving others vulnerable. The prolonged Greek debt crisis reflects this concern, and has presented serious doubts over the success of the single currency and the true solidarity among Eurozone members.

Greece did not receive full creditor approval on May 22 for a loan disbursement and going forward, the German Finance Ministry’s pressure for further cuts appear to be a way to effectively delay talks on debt relief, possibly until German elections conclude. The credibility of Europe’s commitment to unity and equality among EU and Eurozone members will be tested if it becomes obvious that the CDU, a champion of a “common Europe”, used Greek economic vulnerability to advance party interests. It is certain that without prompt action geared toward debt relief, Greek economic growth will remain elusive, and the prospect of ‘Grexit’ could be more realistic.

Andrew H. Ntapalis received his Master of Arts degree in History from the University of New Hampshire, specializing in European Political History, with a focus on the political development of both ancient and modern Greece.