I was asked this week in the Commons if I thought Germany was an independent country. Some were surprised when I said that of course it is not. Some people keep on confusing power with sovereignty. Germany is a powerful country, but her actions are now very circumscribed by the EU and more especially by the Euro. Germany had no wish to lend large sums of money to Greece, but has done so indirectly via the European Central Bank because she cannot win the votes and arguments on that body on some of the most important issues.
Germany and Greece are now locked together in a relationship of their making which is bigger and more powerful than either government. Mrs Merkel has to allow more and more lending to Greece whilst in public saying there will be no more loans unless Greece agrees to austerity policies to cut the deficit more. Greece has to listen to endless sermons on how to change its public spending and tax policies.In order to qualify for official loans to keep it going she has to agree to some of the advice. Previous Greek governments accepted the requirements and presided over a 25% decline in the output and incomes of their country as a result.
I have always assumed they will muddle through to a “solution”, with Greece promising a bit more by way of reform, and Germany agreeing to more loans. That would be more of the same which has sustained this difficult and precarious relationship since Greece joined the Euro. Germany has more supporters in the rest of the Euro than Greece on some of these issues, but has lost the battle over quantitative easing and a generally easier monetary policy.
The brinkmanship is now quite extensive on both sides. Germany has recently threatened Greece with the imposition of capital controls. This would mean that instead of the European Central Bank continuing to lend the Greek banks any amount of money they need to replace lost deposits, the Greek banks would instead have to tell depositors they can no longer withdraw their money, or can only withdraw it on worse terms. This is what the Euro authorities made Cyprus do, creating effectively a Cypriot Euro which was worth less than everyone else’s euro. The Syriza Greek government for its part simply refuses to cut pensions and pay, pointing out that Greece needs more demand to grow, not less.
Germany has drawn attention to the possibility of capital controls because clearly Germany is rightly alarmed by the huge build up in ECB loans to Greece, now in excess of Euro 83 billion. Sometime these two – and the other Euro members- are going to have to sit down and talk about debt cancellation. The trouble is the creditors will want more austerity policies which the Greek people and their government do not want. That’s why it is always easier to put off a settlement, just as long as the Germans have under the rules of the game to stand behind ever more lending to an unreformed Greece.
Neither side has wanted to bring the crisis to a head. If one does, then we will see the real negotiation. If Germany wants to keep the entire Euro enough she will have to allow Greece more money and more leeway. If Greece is more worried about capital controls and being excluded from the full Euro scheme then she will have to bow to more of the demands of her creditors. Agreement means Greece spending less or taxing more, and it means Germany paying or lending more to Greece. It is still not clear which side is the stronger in its resolve.