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The Mediterranean Bailout: German Virtue or Necessity?

The German government has finally given up its resistance to a multinational bailout program for the Mediterranean EU member states.
 
 
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BERLIN, May 11, 2010 (IPS) - Under pressure from its European Union (EU) peers and confronted with the undeniable realities of the Greek financial collapse, the German government has finally given up its resistance to a multinational bailout program for the Mediterranean EU member states.

During an urgent meeting in Brussels this weekend, the EU governments and the European Commission (EC) agreed to a rescue package worth 720 billion euro (916 billion U.S. dollars) to be made available for Greece, Spain, Portugal, and eventually Italy and Ireland.

According to the agreement, the International Monetary Fund (IMF) will contribute 200 billion euro (264 billion dollars) to the package.

In the worst case scenario, Germany would have to provide 120 billion euro (916 billion dollars) to support Mediterranean countries facing economic collapse as a consequence of the global crisis and speculative attacks by hedge funds.

By accepting the EU rescue package, German Chancellor Angela Merkel gave up her month-long opposition to support for Greek state finances.

Numerous European and German politicians and economic experts believe that Merkel's opposition aggravated the crisis, by unintentionally encouraging hedge funds to speculate against Greek state securities and the common European currency, the euro.

As the Greek crisis unfolded, in February and March, German officials even suggested that Greece leave the European Monetary Union (EMU) and reintroduce its national currency, to be able to devalue it as a response to the crisis.

Germany's attitude led French commentators to dub Merkel 'Madame Non.' The nickname was once applied to the British leader of the 1980s, Margaret Thatcher.

"Both the Greek unreliable state debt accounts [which concealed the real levels of state deficits and debt to become part of the EMU] and the German reticence to financially support the government in Athens were an invitation to speculative funds" to attack the euro, Gustav Horn, director of the Berlin-based Macroeconomic Policy Institute, told IPS.

Both factors contributed to a skyrocketing rise of risk spreads for Greek state bonds at the financial markets and to increase the financial market turbulence, Horn said. Downgrade of Greek credit-worthiness by international rating agencies followed. By Apr. 9, the spreads for Greek debt bonds were 420 points higher than for the German debt, against only 75 points for Spanish bonds.

A similar disapproving position towards the government was adopted by Frank-Walter Steinmeier, parliamentary leader of the German opposition Social Democratic Party.

"By denying Greece financial support in February and March, Chancellor Merkel is responsible for an enormous calamity in Europe," Steinmeier said May 5 during a debate in the German Bundestag, the lower chamber of the parliament.

As a consequence, Greece will pay higher interest rates to renegotiate state debt bonds or obtain new credits, than two months ago. Furthermore, the speculation has led to a rapid devaluation of the euro as compared with the dollar (by more than 20 percent in four months) and has increased the risk of contagion to other European Mediterranean states.

Criticism of Merkel's resistance to bailout was widespread. For Jacques Le Cacheux, director of the French Centre for Economic Research, the German official position towards the crisis of state finances in Europe and its trade policies within the area "are a contradiction."

On the one hand, Le Cacheux told IPS, "Germany insisted up to now that only budget and macroeconomic discipline in the Euro zone can help to maintain the stability of the common currency."

However, he said, this rationale is no longer useful when it comes down to solving a serious credibility crisis of the common currency. On the other hand, Le Cacheux added, "Germany maintains a mercantilist policy of supporting exports towards the European countries by depressing its labour costs, which reduces its own domestic demand, leading to substantial German surpluses in international trade, especially with the Mediterranean countries."