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Centre for European Reform: Germany, the Euro, and the Politics of the Bail-Out

Author: Katinka Barsych
June 28, 2010

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In this briefing note, Katinka Barsych examines the shifting relationship between Germany and the EU in the wake of the euro crisis and the ensuing financial aid package.

On May 2nd, eurozone finance ministers, the IMF and the Greek government agreed on a loan package for Greece worth up to S110 billion over three years. The decision came more than one month after EU leaders had agreed on the broad outlines of financial support and two and half months after they first discussed the option of helping Greece. Most people blamed Berlin for the delay. Angela Merkel’s hesitancy and prevarication increased the cost of the bail-out, unsettled financial markets and poisoned the political atmosphere in Europe. Some commentators have accused Germany of being selfish, lacking solidarity with its EU partners, and putting domestic politics ahead of the survival of the euro. Analysts have concluded that Merkel simply does not ‘get’ financial markets. Those with a knack for conspiracy theories mused whether Berlin had dragged its feet in the hope that Portugal, Greece and Spain would be forced out of the euro, leaving only ‘stability oriented’ northerners within the single currency.

After the May 2nd deal, it took the Europeans only another week to agree on a second, much bigger financial support package for the other eurozone countries: a total of S750 billion, of which S440 billion would come in the form of loans guaranteed by individual EU countries. Unlike the loan to Greece, which is already being disbursed, the second package is meant as a safety net in case Portugal, Spain or Ireland struggle to fund themselves in the bond markets.

As the eurozone’s largest member, Germany is the single biggest contributor to both deals: S23 billion for the Greek bail-out and potentially S120 billion in guaranteed loans for the second package. Yet the criticism of Germany has not died down. Many Germans admit that Merkel’s tardy decision-making made the bail-out more expensive. However, they plead understanding by pointing to domestic political constraints: belligerent public opinion, a crucial election in Germany’s biggest state and a looming case at the constitutional court, not to mention occasional dissonance between the chancellery and the finance ministry. More importantly, they argue that if the EU countries had just handed over money to Greece without tough conditions attached, the sums would have been wasted. Unless the markets believe that the bail-out triggers sustainable fiscal consolidation,the eurozone may unravel. Since Germany sees itself as Europe’s traditional monetary anchor, it felt responsible for forcing Greece and other South European countries back on to the path of fiscal rectitude.

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