19 February 2012

Wolfgang Münchau: Greece must default if it wants democracy

Münchau writes in his FT column that he knew the game would soon be up when Wolfgang Schäuble proposed that Greece should postpone its elections as a condition for further help. We are at the point where success is no longer compatible with democracy.

The German finance minister wants to prevent a “wrong” democratic choice. Similar to this is the suggestion to let the elections go ahead, but to have a grand coalition irrespective of the outcome. The eurozone wants to impose its choice of government on Greece – the eurozone’s first colony.

I understand Mr Schäuble’s dilemma. He has a fiduciary duty to his parliament and is being asked to sign off on a programme that he doubts will work. Releasing the funds before an election is risky. What is to stop a new Greek government and a new parliament from unilaterally changing the agreement?

A senior German official has told me that his preference is to force Greece into an immediate default. I can therefore only make sense of Mr Schäuble’s proposal to postpone elections as a targeted provocation intended to illicit an extreme reaction from Athens. If that was the goal, it seems to be working. Karolos Papoulias, the Greek president, fired back at Mr Schäuble’s “insults”. Evangelos Venizelos, finance minister, said certain elements wanted to push Greece out of the eurozone. Conspiracy theories abound.

The situation highlights the political vulnerability of the current eurozone rescue strategy. Let us set economic arguments aside for once, and consider the politics. Anybody calling for an increase in the rescue package should remember that solidarity between governments is close to being exhausted. This has happened even before a single cent has crossed a border. It is also the strongest argument for a fiscal union. If you want to shift hundreds of billions of euros around, you simply cannot do this on an inter-government basis, where Germany, the Netherlands and Finland pay for Greece, Portugal and Ireland. For that, you need a federal system. You need it not for reasons of economic efficiency but to prevent a Germany-versus-Greece type conflict. If a fiscal union turns out to be politically unacceptable then we simply have to admit that a transfer insurance system cannot and will not happen.

The reason the current system is breaking down is the loss of mutual trust. It narrows the political options of crisis resolution. Mistrust is the reason why the Greek rescue package has been delayed until the latest possible moment, and why the latest proposals contain so many poison pills: implementation deadlines, the escrow account, and a permanent representation of creditors and the International Monetary Fund. Soon there will be yet more austerity. At some point, somebody will snap.

The German strategy seems to be to make life so unbearable that the Greeks themselves will want to leave the eurozone. Ms Merkel certainly does not want to be caught with a smoking gun in her hand. It is a strategy of assisted suicide, and one that is extremely dangerous and irresponsible.

Full article (FT subscription required)

© Financial Times