Germany Rescues Greece but Demands its Pound of Flesh

Today’s European Union summit in Brussels will set out the framework for a financial rescue operation for Greece.  This much is clear is from various briefings being given by officials from countries as varied as Austria, Lithuania, Poland and Spain.  But financial markets will have to wait until next week to see the full details of the plan.

The central question is how far Germany has been pushed to swallow its words and offer help for Greece, after weeks of denying that it would do anything of the sort.  Only this morning Otmar Issing, the German former chief economist of the European Central Bank, was telling German television viewers that Greeks enjoyed “one of the most luxurious pensions systems in the world” and it was unreasonable to expect German taxpayers to fund it.

He is absolutely right, of course.  But to fund or not to fund Greek pensions is not the choice facing the German government at this critical hour.  The real choice is whether or not to tolerate the financial collapse of a eurozone member-state, a mere 11 years after the euro’s birth.  To that, there is only one answer: No.  And so Germany, with others, will have to support Greece – through loan facilities, guarantees or similar means.

The Germans will in return extract their pound of flesh from Greece.  The Greek government will lose a great deal of fiscal sovereignty as it struggles to restore order to its public finances over the next three years.  If it looks in danger of missing its budget deficit reduction targets, there will be EU experts leaning over the Greeks’ shoulders and telling them what to do.  Nothing like this has ever been attempted in the EU’s 53-year history.

Will it work?  Will Greeks take their medicine?  It will not be simple.  On the one hand, there is a strong strain of puerile anti-capitalist, anti-imperialist feeling in Greek society.  On the other, anti-German sentiments linger from Greece’s horrific experiences under Nazi occupation from 1941 to 1944.  It would not be difficult for populist forces to draw on these prejudices and link them to the austerity plan that the EU is about to force on the Greek government.

For the moment, the Greek public seems to understand that difficult times lie ahead and that everyone is going to have to make sacrifices – “no new car and cheaper make-up”, as one middle-class Greek woman puts it.  Ah-hem … better not pass on that to Otmar Issing!