A New Start For Greece, An Opportunity For Germany

If misperceptions solidify, they become a reality. This seems to be the biggest political risk of the euro crisis. As a German living abroad I am amazed about the gulf between perceptions of the European crisis in Germany and in southern Europe.

If you follow the German debate, you get the impression that the irresponsible debt policy of the southern European countries is exclusively to blame for the euro crisis and that the industrious but stupid Germans should be asked to pay for it. Meanwhile, in southern Europe the opinion prevails that Germany uses its economic strength to force the rest of Europe into accepting austerity measures, which above all benefit the German economy and satisfy the German desire for dominating Europe. Both views are rubbish, but extremely dangerous – if they are believed.

Of course, it triggers outrage in Germany when Angela Merkel is compared with Hitler and when financial support is tied to political conditions and then compared to the occupation by the Wehrmacht. And in Greece people are legitimately offended if Greeks are misrepresented in the German media as largely lazy, corrupt and mendacious and if German politicians try to intervene and influence the Greek election campaign.

The process of deepening antipathies resulting from these offensive misconceptions must be quickly stopped in its path. In Germany, the growing anti-German sentiment in many neighbouring countries is too easily dismissed as senseless and unjustified. It carries the risk of a creeping isolation of Germany threatening in turn a shift from often painfully slow European cooperation to antagonistic blockades. Misconceptions don’t arise for no real reason. They cannot simply be overcome by a PR and marketing campaign, but require changes in policy.

The financial crisis, and the resulting Euro crisis, is a European policy failure and thus a joint responsibility. The lack of adequate financial market regulation resulted in irresponsible borrowing and lending, and when it all collapsed, governments were forced to socialize the losses in order to avoid a systemic breakdown. The loans to Greece were therefore by and large not motivated by charity or solidarity, but to a considerable extent by a healthy self-interest. The compromise found was that German taxpayers bear a substantial part of the default risk and the Greek ones the burden of interest and principal payments to protect international – including German and Greek – banks.

The aid package was mainly there to finance the switch from private to state creditors. In place of private banks and their shareholders foreign states and their taxpayers became holders of the bulk of Greek debt. This bailout was obviously deeply unfair as it let the irresponsible lenders off the hook, but had the advantage that the debt problem could be solved without risking an economic meltdown. However, this expensive rescue operation may have saved the banks but there was subsequently a lack of political agreement on how to solve the public debt crisis that came about largely from saving the private banking sector.

On the German side, the rapid consolidation of public finances and the implementation of structural reforms are seen as the sole priority. No doubt, some of these reforms make sense: neither Greece nor Germany needs a monopoly of pharmacists, and the favourable tax treatment of Greek ship-owners is as nonsensical as the German tax shelter for shipping funds. However, removing a third of the population from collective health care is neither socially nor economically nor politically sensible.

Structural reforms are an undeniable and constant requirement in order to compete internationally. But they do not trigger economic growth if they take place in parallel with a collapse in employment, a steep drop in aggregate demand and the on-going risk of sovereign default and euro zone exit. In particular, hopes of a rapid increase in private investment as a driver of economic recovery under these conditions are completely illusory. It’s not only Greek voters but economic realities that require a change of policy. After such a clear vote by the electorate, previous policy has lost its domestic legitimacy. International insistence on their unconditional continuation will not only reinforce a feeling of humiliation in Greek society but – maybe even more critically for creditor nations – it will not work.

The Greek election is an opportunity for all sides to review their own views on what’s at stake and seek common, sustainable solutions. Right now, the chances of that do not look good. The desperate attempt by Greece to claim reparation for loans imposed on the Greek government by the Nazi regime is unlikely to succeed politically and will put further strain on German-Greek relations. It’s best to respond to such desperate acts with sensible suggestions. Germany has almost all the trump cards in its hands. From this position of strength, flexibility and willingness to compromise is a matter of political wisdom.

A European investment programme for Greece and a debt moratorium until its economy has gone back to the level of 2010 could provide the country with the crucial help it needs to get back on its feet. German guarantees for private-sector direct investment in Greece could also help to promote the necessary investment dynamics. These steps do not mean giving up reasonable and necessary structural adjustments, but enabling them in the first place. Complementing structural reform policies with bold measures to increase investment, growth and employment would not only reduce the risk of Greece defaulting on its debts, but would offer an invaluable political return for Germany.