Why is the German government now in favour of the possibility of Greece leaving the eurozone?

Question

When German chancellor Merkel and others in her party recently said they would be “open” to Greece withdrawing from the euro and introducing a new currency, I remembered how strictly they refused it just a few years ago. They said that many things have changed during the last few years, so it would now be possible.

Wasn’t letting the Greeks reject the euro something which the Merkel government in particular tried to avoid “at all cost” just a few years ago?

What lead to the sudden shift of option, and what would really happen if the Greeks moved to another currency?

Answer 1

In 2010, much of Greece government's debt was in the hand of private investors, especially French and German banks and there were serious concerns that a default could trigger a contagion that would destabilize the whole euro area. So even before any talk of leaving the euro, simply defaulting on the debt could have serious consequences. It might not have been the only explanation but that's a major reason for everyone's attitude back then.

On the other hand, Germany (and some other countries like Finland) had a ready-made medicine to offer: Greece just needed to be more like them, spend less, conduct “structural reforms”, regain competitiveness by depressing wages, no need to leave the euro and all would be well.

In reality, wage moderation is useless if you don't have favorable conditions (namely a decent rate of inflation and growing economy everywhere else) like Germany had in the 1990s and austerity is counter-productive when everybody does it at the same time but, because Greece was clearly spending too much relative to its tax revenue and even cheated to hide it from European institutions, it was still kind of possible to pretend that budget deficit was the only problem and that reducing public spending would solve everything.

Five years on, the debt is in public hands, with zero risks to the banking system outside Greece and many believe Greece has been “ring-fenced” and the Eurozone would not suffer too much if the country were to default and/or leave the euro. Although the latter aspect is disputed and long-term consequences are uncertain, that's enough for several leaders to be more comfortable contemplating an exit now.

Furthermore, on the second point, the austerity programme has been an unmitigated disaster, with an emerging consensus among economists all the way to the IMF that austerity was a very bad idea in current conditions. Spain, Portugal and Ireland haven't recovered from the crisis and only suffered less than Greece because austerity was less intense there. Even countries that do not fit the “spendthrift Southerner” cliché like Finland or the Netherlands are not doing well and only look good because the rest are even worse.

That might seem incidental to your question but it does matter because it means it's just not possible to argue that Greece has a bright future in this euro area, if only it would do what it's asked. Some people in Northern Europe still like to imply as much but it's certainly not convincing to the Greek people who know first-hand how much their country has already done and obviously cannot buy the fantasy that the only problem is handouts and excessive spending.

At this point, avoiding an exit from the Eurozone requires an agreement with the creditor countries and the IMF that satisfies the ECB or some other way to protect the Greek banking system. The Greek government is clearly ready to sacrifice a lot to that end but it cannot simply accept another round of senseless austerity with no debt restructuring, no concession from the other side and no resolution in sight.

By contrast, for the German government (and many other people) accepting anything else than more of the same would call the whole approach into question and belie the narrative they have been peddling to their own citizens for years. So, sincerely or not, they prefer to continue pretending that Greece “needs to do its home work” and risk a Greek exit rather than share the blame and question the central tenets of their economic policy.

From that perspective, pushing Greece out – just like the continuing focus on Greece budget situation prior to the crisis, on the tone of the negotiations or on what the current government did or did not do – is nothing more than a way to avoid facing the fact that austerity is an integral part of the problem. The irony is that while is politically expedient for many people in Europe and without speaking about any potential long-term effects, it does not even protect the creditors' narrow interests as it would mean that they will recover even less money than if they agreed to the debt write-off they so adamantly reject.

Answer 2

Germany benefits a lot from Greece being part of the Eurozone because it exports goods worth 5 Billion Euro per year to Greece. A common currency aids the involved businesses a lot. For that reason Germany was quite willing to invest into Greece staying part of the Eurozone in exchange for the Greek government being cooperative in supporting the European measures to improve their economic situation.

However, the newly elected Syriza government in Greece is far less cooperative than the previous one and refuses to implement many of the policies the rest of the Eurozone deems necessary (whether they actually are necessary or helpful is a matter of opinion I am not going to discuss). Many countries of the Eurozone believe that should Greece not implement the proposed policies, investing further money into the Greece economy is not going to solve its current economic problems and Greece will become more of a liability than an asset to the Eurozone.

Having an own currency might in fact help to solve the Greece economic problems. It will allow them to devalue their new currency independently from the rest of the Eurozone. This will not just reduce their nominal state debt but also allow them to export cheaper which makes them more competitive on the international market.

Note that none of this directly affects the Greece membership in the European Union. The European Union and the Eurozone are two separate institutions. There are several countries which are part of the EU without using the Euro.

Answer 3

Greece's financial crisis is ultimately affecting the rest of the European Union. Being a member of the EU and using the Euro currency, Greece's crisis is bringing down the overall worth of the Euro among the rest of the EU, and is affecting the richest members like Germany.

Greece's massive debt towards the European Union also causes the richer members to lose trust in Greece's legitimate membership in the EU. After all, the EU was originally created to unite the rich countries of Europe to open up borders and share the same currency. It was not specifically welcome to poorer countries, for example Ukraine who wants to become a member.

It makes sense that disapproval is coming from Germany particularly, since they're the richest country in the EU, and Greece's crisis is negatively affecting the economies of all the other EU members, including Germany.

It would be beneficial to the rest of the richer EU members if Greece left the EU, because their economic problems would mostly be interior. But then Greece's financial crisis could become worse because there wouldn't be richer countries to assist their economy.

Answer 4

What I gather from the news is that the German government is trapped in its own game in a way.

Since the 2007-2008 crisis, the Greek have presented to the German population as being lazy, laxing discipline in fiscal policy, etc. This allowed the German government to make pressure on the Greeks to have the reform they wanted instead of simpler bailout. Nevertheless, they never intended to drive the Greeks away from the Eurozone.

However with Siriza, the Greeks started to say that they didn't want to continue that game. Due to the image of the Greeks shown in the German opinion (I mean look at what Bild is presenting), the population does not understand the reason for it, except saying that indeed the Greeks are lazy and if they can't accept the effort required, they should just get out. Politicians, who are adept to read opinion's poll (like, in this case, the SPD), also start to push towards a Grexit. Merkel for historical and personal reasons (according to last night's French news) isn't so keen on it. But as usual, will probably follow the opinion of the majority in Germany.

So in summary, they said the Greeks were lazy to justify the hard policies asked, and now people got so convinced that the government has trouble backing away.