Merkel, Papandreou buying time for debt-stricken Greece

Only two days before a crucial vote in the German parliament on the expansion of the euro rescue fund on Thursday, Greek Prime Minister George Papandreou and Chancellor Angela Merkel gave fighting speeches in Berlin to present a unified front.

Their audience – Germany’s industry leaders assembled at the annual meeting of the German Industry Association (BDI) – applauded. But analysts remain skeptical.

“Yes, we can,” Mr. Papandreou shouted, calling the crisis engulfing his country a “unique chance for Greece to gain new power.” He insisted the efforts of his fellow countrymen to improve the situation deserved respect. “I can guarantee that Greece will fulfill all its international obligations.”

Chancellor Merkel was more than happy to pay respect to her Greek guest. The reforms under way in Greece were impressive, she said. “The most important thing now is for Greece to regain the confidence of the international community. The eurozone as a whole needs to stop being a union of debt, and turn into a union of stability.”

While many guests at the BDI meeting seemed impressed, economists reacted soberly.

“What we are doing right now, is buying time,” says Ferdinand Fichtner of the German Institute for Economic Research in Berlin. “Expanding the euro rescue fund (EFSF), releasing more bailout money to Greece – all that buys time. But in the end there will have to be a haircut," says Mr. Fichtner, referring to a write-off of a portion of debt. "It’s the only solution for Greece.”

Writing off a large part of Greek debt – 50 percent seems to be the number agreed on by experts – is risky for Europe’s leaders, as it could threaten financial stability at home. “A haircut will mean that a number of banks holding Greek debt will waver,” says Fichtner. “They will need capital – and recapitalizing banks is not very popular after the 2008 banking crisis.”

Common ground

In some respects Mrs. Merkel’s problems and those of her Greek colleague are actually not that different. Both need to convince their countries that sacrifice is good.

Germans are being told that they need to guarantee for large parts of the credit Greece needs to keep its economy going, otherwise the common currency is in danger and that would hurt the German economy, too. And Greeks are hearing that they need to accept rising taxes and falling wages in order to avoid default.

The message is not welcome. Polls in Germany show a growing number of people disagreeing with more financial aid for Athens. In Greece another strike by transport workers today made clear there is less support for reform than Mr. Papandreou claims.

A Greek raised in Germany

But Alexa Stavrakakis hears both sides. Born and raised in Berlin by her Greek parents, who came to the German capital more than 25 years ago, she now studies politics, and on weekends helps her father in his Greek restaurant.

“I’m stuck in the middle,” she says. “I have a German mind, and a Greek temperament. I can see why Germans don’t want their money to disappear in rescue funds. I’m just back from Greece, and the infrastructure there is terrible, the streets full of potholes, the airport a mess. I don’t want my taxes used to pay for this.”

But when her Greek relatives argue that Germany never paid reparations for the extensive damages inflicted during the second World War, and that now was the time to make up for that, Alexa can sympathize. “In two years' time my parents want to retire to Greece. I’m worried – how can they go back if the country is in such a state?”

Next week the German economy minister Philipp Rösler will lead a delegation of German executives to Athens. The visit will be a chance to complement vocal support with solid investment. But before that, Merkel needs to win Thursday's vote, ratifying the planned expansion of the euro rescue fund from its current 440 billion euro guarantee sum to 780 billion euros.

The vote is no longer just about money for ailing eurozone members. It is about Merkel’s credibility as leader of Europe’s strongest economy. Up to 19 parliamentarians from her governing coalition have announced they will vote against the plan. Should she lose just one more, and she will need to rally opposition support to get the desired result.