Monday, 10 May 2010

Angie’s anguish

Poor Angela Merkel. You do have to sympathize with the conservative German chancellor, trapped between a rock and a hard place. The dire situation in Greece requires her to commit tons of German money to keep the crisis from spreading throughout the eurozone. But a bail-out of this Meditteranean nation that has behaved so badly is enormously distasteful to the German public.

It’s a bit like the fable of the grasshopper and the ant. Germany has held down wages and been frugal in its spending, while Greece has been profligate and irresponsible, spending far more than they had while at the same time not bothering to collect taxes appropriately. For the average German, it’s enfuriating that the squirell will now have to bail out the racoon.

But perhaps the more appropriate literary counterpart for Angie is Hamlet. Her foot-dragging and indecision during this crisis has been blamed by many for making the crisis get far worse. In the end she had to relent - so the delay accomplished nothing but exacerbated the problem. This weekend EU finance ministers agreed to establish a €962bn emergency crisis fund. It’s designed to stop the financial market turmoil as the situation in Greece deteriorates, reassuring jittery investors that the problem will be solved. Yet many are concerned that this fund is too late, and should have been agreed weeks ago before the situation got out of hand. Back then, it was Merkel who was the lone EU leader standing in the way. She knew the German people would punish her for agreeing to a bail-out.

And almost immediately, the German people delivered their rebuke yesterday, handing Merkel’s ruling coalition an overwhelming defeat in a bundesrat election in North Rhine-Westphalia. That's German efficiency for you. The loss means Merkel has lost her majority in the German upper house, the equivalent of the US senate or the UK House of Lords. Th German media is crediting the Greek bail-out for the result.

Just six months into her second term in office, Merkel will now face an uphill climb in trying to pass the economic reforms she promised. She will have to rely on the centre-left opposition parties, and her main rivals the Social Democrats (SPD) have already said they will fight her on many of her plans. They have also been very critical of the way she has handled the economic crisis.

For the short term, the SPD came out early after the election result yesterday to assure the markets that they would not block the bail-out agreed over the weekend. They had to do this to calm the markets, because just last week the SPD tried to block a vote on the Greek bail-out. Their win on Sunday has called their bluff, because clearly that move last week was just the usual political posturing by an opposition party. Now that they control the bundesrat, they are keen to emphasize their pro-EU credentials. Quite a sudden change of heart on their part!

Meanwhile the violence in Greece keeps getting worse, with protestors killing several people in a bank last week. The Greeks are furious about the cuts to their salary and pensions that the Germans are requiring as a precondition to receiving the bail-out money. To people watching from outside the country it’s a bit hard to understand their actions. What are they protesting exactly? The conservative government that got Greece into this mess has already been voted out. The current Socialist government had nothing to do with it, but came into office having to clean up the mess. If the government doesn't make any cuts to the already inflated public service sector the country will go bankrupt. It’s a bit bizarre for the Greeks to be burning German flags on the street when it is the Germans who are stepping in to help them. Such images are certainly not engendering any good feelings north of the Alps.

But I imagine from the inside it looks very different. Greeks are likely enormously frustrated about the situation and are venting their anger at whomever they can. In many ways Greece is the victim of predatory investors and an unfair global financial sytem. But the Greeks also have themselves to blame for the reckless way they ran their economy over the past decade. Given the shared blame, the demonstrations are a bit hard to take for Northern Europeans. The violent protests are making the situation much worse and accelerating the country’s spiral toward collapse.

It’s too early to say whether the agreement reached this weekend will calm the markets. Initial reaction gave the euro a slight boost against the dollar (and a big one against the pound for obvious unrelated reasons). But over the next week it should become clear whether the chaos has been contained, or whether it will spread to the other PIGS countries – Portugal, Italy and Spain.

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