The Greek saga's next chapter moves to Germany
The three-year, 86 billion ($94 billion) euro bailout plan for Greece faces a key test tomorrow -- in Germany's parliament known as the Bundestag. Lawmakers there will decide whether to approve reopening talks with Greece over the third bailout, whose outlines were hammered out over the weekend.
Germany is Europe's largest economy and Greece's largest creditor. Chancellor Angela Merkel had insisted that the International Monetary Fund (IMF) participate in the new Greek bailout, it's third since 2010. But IMF officials are pushing Greece's creditors to reduce the country's debt, known in bureaucratic jargon as "taking a haircut."
Merkel, who demanded the IMF's involvement in the financial rescue, has balked at such efforts, which many economists back, because many Germans oppose additional aid to Greece.
"This question of a debt haircut will keep coming back to them," Heather Conley, a senior vice president at the Center for Strategic and International Affairs, told CBS MoneyWatch. "It will be interesting to see who gives on this -- the Germans or the IMF."
Merkel's hard line toward Greece has come under fire in the German media, with Der Spiegel accusing the chancellor of squandering the political will that had taken Germany decades to build up after the end of World War II.
One wildcard is German Finance Minister Wolfgang Schauble, who doesn't think Greece has the resolve to follow through on the austerity measures that creditors have demanded -- and that the Greek parliament has approved. In an interview with German radio, he argued that Greece would be better off leaving the euro and that providing debt relief for Greece would violate a European Union treaty.
"But the same result could be achieved if the euro area gave Greece some free money (i.e. grants) to help repay official debt," wrote Miranda Xafa, an economist who served as an advisor to former Greek Prime Minister Konstantinos Mitsotakas, in an email to CBS MoneyWatch.
If Germany and other eurozone countries approve the Greek bailout, the next key deadline is July 20, when Greece must make a 3.5 billion euro ($3.8 billion) payment to the European Central Bank. Greece missed a $1.7 billion payment to the IMF earlier this month and a 456 million euro ($496 million) payment expected earlier this week. The country's European bailout package has also expired.
Greece's economy is in a free fall, and the country is politically unstable, especially since many of Prime Minister Alexis Tsipras' parliamentary allies voted against the tax increase and spending cuts creditors demanded and Tsipras acceded to. Those terms were much harsher than the ones Greek voters soundly rejected in the hastily called referendum by Tsipras.
Not surprisingly, violent protests erupted in Athens last night as parliament debated and ultimately approved the bailout terms. According to Elaine Papoulias, executive director at Harvard University's Minda de Gunzburg Center for European Studies, Greece will remain politically unstable for "quite some time."
GDP has plunged by about 25 percent over the past five years, and had just registered some growth before falling again by 3 percent since Tsipras' election in January. Economists say economic conditions in Greece are worse now than they were in the U.S. during the Great Depression.
"This was the result of the uncertainty they created, which froze investment (and consumption to some extent), resulted in massive deposit withdrawals from banks, leading eventually to capital controls that will inflict permanent damage by remaining in place even after banks reopen," Greek economist Xafa wrote.
Greece's problems, though, predate Tsipras' coming to power. The country's politicians have long failed to address long-standing concerns about Greece's overly generous pension system and its ineffective tax system that has allowed evasion to become rampant.
Banks in Greece have been shuttered for three weeks but are now due to open Monday because the ECB has extended further liquidity to them, but restrictions on withdrawals will be lifted only gradually. Had the banks been allowed to open before the ECB raised its support, they would have collapsed amid a massive exodus of depositors, economists have said.
"Once you impose capital controls. you never pull them off quickly," Conley said. "Iceland still has capital controls from 2008. ... As soon as they lift those capital controls, people are going to just yank a lot more money out of the system."
Indeed, the Greek people are bearing the brunt of their country's fiscal woes. Harvard's Papoulias says an acquaintance of hers who's a Greek citizen recently tried and failed to find bullets for a rifle he wanted to use to protect his property where he was storing his life savings and his mother's.
"Right before out eyes," she said, "a developed, industrialized First World country is almost becoming a Third World country."