Judging from the stream of rumors and energetic denials, German bureaucrats, experts, and politicians are furiously working on dozens of projects that all deal with the debt crisis, and they go off in as many directions.
Reports surfaced today that Chancellor Angela Merkel wants to accelerate amending the Lisbon Treaty so that debt-sinner countries that can’t get their budgets in order would be dealt with more harshly—through imposition of additional sanctions (just how they’d pay for these sanctions when they’re already having trouble funding their deficits hasn’t been addressed, apparently).
The Lisbon Treaty is a chef d’œuvre of the 27 members of the European Union. Negotiations started in 2001 to establish the European Constitution, which flopped in 2005 when French and Dutch voters said non and neen. A watered-down compromise treaty was worked out that everyone could agree on. But in 2008, Irish voters didn’t agree on it. Then the financial crisis hit. The Irish got scared, and when the referendum was re-run, voters changed their mind. The treaty became effective December 1, 2009, after eight years of struggle. And now, according to Reuters, Merkel wants to rush very unpopular sanctions through the system: amendments on the table by next spring and ratification by all 27 members at the end of 2012.
Another report surfaced in the Spiegel. Experts at the Ministry of Finance are working on scenarios that incorporate Greece’s exit from the Eurozone. The idea that not long ago was part of the official Denkverbot (prohibition to think) became official language at the G-20 after Giorgios Papandreou, prime minister of Greece, had fired his referendum bazooka into the air. And now it has transmogrified into actual scenarios.
The underlying assumption is that Greece will not implement the agreed-upon budgetary measures and economic restructuring. Such a failure would entail Greece’s exit from the Eurozone. And when that happens, the experts envision a range of scenarios, according to the Spiegel, from rather benign to, well, rough.
It starts with the basis scenario. Greece reinstitutes the drachma. After some initial chaos, the removal of the weakest country of the Eurozone might strengthen the Eurozone over time. While other countries, like Italy and Spain, would still have difficulties, they would be better able to manage their problems if the source of uncertainty is removed. Spain and Italy aren’t bankrupt, the experts claim, unlike Greece.
And further down the line is the “Worst-Case-Szenario.” (That’s actual German I’m quoting. The quantity of English in everyday German never fails to astonish me though it can be helpful … unless it’s not helpful, like the noun handy, which isn’t a sexual act but a cell phone.) Italy and Spain would be targeted by global financial markets after Greece’s exit. Their yields would rise and their financing costs would reach unsustainable levels. The EFSF, a JELL-O-like structure, would be forced to fund these two countries—but it would have to have lots of firepower, which is increasingly in doubt.
And then there is—I’m quoting again in German—the “Worst-Worst-Case-Szenario.” The drachma would be dramatically devalued, which would make Greek exports more competitive and would help tourism. Germans with little money and lots of time off could go for cheap but long and gorgeous vacations.
But Greece’s debt is in euros and will have to be serviced and paid back in euros, impossible with a devalued drachma. Hard currency would dry up. International capital markets would close their doors to Greece. Greek banks and companies, whose debt is in euros, would go bankrupt. Massive layoffs would follow. Consumption would collapse. And in the process, it would take down smaller countries, such as Cyprus, that are heavily exposed to Greek sovereign, corporate, and bank debt.
Thankfully, according to the Spiegel’s government sources, the “Worst-Worst-Case-Szenario” is not the most likely.
Meanwhile, Greek teachers are lamenting their new reality. They’ve long been ridiculed in Germany for their cush jobs with long vacations, short work days, high salaries, early retirement, and lots of benefits and privileges that have been doled out by various governments as part of their vote-buying binges funded by a seemingly endless stream of borrowed euros.
But now, the cuts are here, and they’re real. Salaries got cut by over 20%. Christmas bonuses got cut by 50% (wait a minute, Christmas bonuses?). But prices are about average for the Eurozone, and after tax increases, the purchasing power got slammed. Which raises the question for how much longer the population is willing to go along with these measures—and if there isn’t, as the Germans would say, a Worst-Worst-Worst-Case-Szenario waiting to play out.