Deckchair wars

When they found out the Greeks had been cooking their books to hide their debts, the Germans had a sense of humour failure

Relations between two of the European Union's prominent members are becoming increasingly strained. With deepening German disgruntlement at Greece's long-term economic mismanagement - and the possible knock-on effects for its Eurozone partners - there may well be a few less towels carefully arranged on sunloungers across the Aegean come this summer.

The German popular press of late has taken to describing their southern neighbour as the sick man of Europe over whom the spectre of contagion hovers. There is little doubt that Greece is not performing well economically. Problems with industrial investment have not been helped by the recession-generated fall in visitor numbers over the last two holiday seasons, which is a hefty blow to a country where tourism accounts for 15 per cent of the GDP. An overweighty bureaucratic structure and widespread political corruption have also not helped. Last November, Greece announced that its budget deficit for 2009 would be 12.8 per cent - nearly twice what the government had previously forecast. Its European neighbours were understandably aggrieved at this egregious mismanagement and accused Greece of deliberately hiding the size of the deficit with dodgy accounting. Germany finds it hard to forget that Greece's admittance to membership of the euro was famously exposed back in 2004 as having been based on fiddled figures, and that only once since then, in 2006, has it managed to comply with Maastricht criteria. The international credit analysts Fitch Ratings downgraded Greece's designation to BBB+, which may be the kind of mark you'd be content to get for your Chemistry homework, but in investment terms represents a "medium risk". Anything that falls under BBB is considered a junk investment. Not so great then, if not quite a full-blown Greek tragedy. Nevertheless, when the news hit Bloomberg, the jumpy markets reacted immediately, jettisoning Greek government bonds by the bucketload.

This is particularly worrying for Germany - a major investor in these ten-year bonds. Greece has borrowed, in total, 110 per cent of the country's economic output, leaving it in a precipitous situation that some speculators think could cause another market crash in the coming months. There is a widespread perception in the German press that Greece is the millstone round the neck of the Eurozone. Josef Ackermann, CEO of Deutsche Bank, made the unusual step back in August of last year of naming and shaming Greece as a potential "time bomb" - one of several highly-indebted southern states for whom a financial wobble could mean considerable collateral damage. For the Eurozone, this is a risk that needs to be taken seriously. In February 2009, the then German finance minister, Peer Steinbrück, controversially made an assurance to help Greece meet its repayments should it find itself in danger of default. The German Chancellor, Angela Merkel, followed this up by speaking in December of the "common responsibility" of member states to protect the financial status of the EU as a whole. The French finance minister, Christine Lagarde, also assured support in the aftermath of the Greek ratings redesignation, calling the union a "monetary zone of complete solidarity."

These statements are a clear indication of concerns over a possible domino effect, which would severely compromise the integrity of the union as a whole. Current EU legislation in fact prevents one member state lending to another for the specific purpose of preventing bankruptcy. In practice, there would be little alternative but for the cohorts of the Eurozone to step in. However, the question is not merely whether the richer nations of Northern Europe would be prepared to toss out the lifebelt, but whether the Greeks would be prepared to accept it.

Being rescued means being indebted not only financially but politically too. Germany would naturally expect to purchase some influence for its troubles, and any forfeiture of national sovereignty to a foreign power - especially one that has a very different culture of governance - would not sit at all well with the proud Pan-Hellenists. If they lease the purse-strings to another country, the Greeks would lose their claim to popular sovereignty and independence - quite a pill to swallow for the ancestral home of democracy.

What would happen if Greece went broke? Some have suggested that a possible return to "local" state currencies could be an option. Might we be looking at the return for the drachma, the lire and even the deutschmark? This is something that the German governments of Schröder and Merkel have spoken vociferously against - a return to multiple currencies, and the ensuing retreat back to the days of international speculation, with countries betting against one another, would undermine both the current prosperity and future development of Europe. The European Commission has recommended a co-ordination of the national economic strategies of all member states. The Spanish Prime Minister, José Luis Rodríguez Zapatero has gone one further, calling for sanctions against countries who fail to comply with the imposition of a blanket unified policy.

However, fears that Greece may be forced to default were somewhat allayed when the recent batch of government bonds were snapped up with unexpected voracity by investors to the tune of around €20 billion, four times the forecast amount. However, Greece did not get off scot-free. The bonds have an extremely high interest rate. The EU may demand even more dramatic deficit reduction measures when Greece's plans are presented for approval next February. The relationship between Greece and Germany is likely to remain less than wunderbar for a little while longer.

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