How Schäuble’s failures shape the eurozone fight

German Finance Minister Wolfgang Schaeuble attends a German-Greek chamber of industry meeting in Athens, on July 18, 2013. Local authorities stepped up security in the capital for the visit, as Schaeuble is seen by some in Greece as a champion of the tough austerity policies that have gripped the country for the past four years. AFP PHOTO / Angelos TzortzinisPhoto credit to Angelos Tzortzinis /AFP.

Though it’s Yanis Varoufakis, the Marxist economist and recently deposed Greek finance minister, who is typically painted in the media as the drag on the long-running negotiations to avoid a Greek default and keep the country within the eurozone, his intransigence has been met at every step of the way by Germany’s finance minister Wolfgang Schäuble, whose sneering impatience for Greek demands has been no less personal than Varoufakis’s over-the-top denunciations of European ministerial colleagues as ‘terrorists.’Germany Flag Icon

Schäuble’s sharp-tongued wit has been a constant through five years of negotiations that stretch back long before prime minister Alexis Tsipras and the far-left SYRIZA (Συνασπισμός Ριζοσπαστικής Αριστεράς, the Coalition of the Radical Left) took power in January. On Thursday, Schäuble joked to an increasingly concerned US treasury secretary Jack Lew that he would be willing to swap Europe’s Greece troubles for Puerto Rico’s debt crisis.

When it comes to Greece, Schäuble is in many ways Germany’s opposition leader, even though he’s a stalwart of chancellor Angela Merkel’s governing Christlich Demokratische Union Deutschlands (CDU, Christian Democratic Party). He’s made it clear throughout the course of negotiations that he favors pushing Greece out of the eurozone, a result that other European leaders worry could destroy the single currency’s credibility — not to mention plunge Greece into an even more painful depression. Back in 2011 and 2012, few German politicians — just a handful of grey-haired Bavarian conservatives — were willing to call for Greece’s eurozone exit. Today, however, it’s a mainstream position, even on the center-left.

Germany is currently governed through a ‘grand coalition’ between the center-right CDU and the Sozialdemokratische Partei Deutschlands (SPD, Social Democratic Party) that includes around 80% of the entire Bundestag, the lower house of the German parliament. Nevertheless, Merkel is limited in her maneuverability — if she gives too much to Greece, there’s a chance Schäuble could lead a revolt of CDU backbenchers who already worry Merkel has transformed the party into a political amoeba that sways to the path of political expediency.

As Tsipras and his new finance minister Euclid Tsakalotos wait for Greece’s creditors to evaluation the government’s probable last proposal for debt relief, there’s a lot that lies in Schäuble’s hands. Even as French president François Hollande has directed his entire economic leadership — prime minister Manuel Valls, finance minister Michel Sapin and economic minister Emmanuel Macron — to help save Greece’s place in the eurozone, German doubts about the deal, a three-year bailout of over €50 billion, could still derail Saturday’s deadline. A full summit of the European Union’s leaders has been scheduled for Sunday. With banks running out of money and Greece banks nearing insolvency, European leaders have made it clear that if they don’t reach a deal with Tsipras on Saturday, they will spend Sunday addressing how Greece will exit the single currency.

Germany, as the largest member-state, is the largest contribution to any stability funding that comes from the European Commission and/or the European Central Bank. It’s currently on the hook for around €90 billion of Greece’s €5320 billion public debt. Merkel, despite doubts in her own party, has supported Greece’s two bailouts in the past, though she’s done so by demanding harsh strings that satisfy her own conservative flank and, of course, German taxpayers, who are ultimately on the hook for nearly one-third of Greece’s bailout debt.

Back in 2010, with a nod to moral hazard, Merkel cruelly told then-prime minister George Papandreou that she had to make the bailout as difficult as possible:

Mr. Papandreou says that when he asked German Chancellor Angela Merkel for gentler conditions in 2010, she replied that the aid program had to hurt. “We want to make sure nobody else will want this,” Ms. Merkel told him.

In principle, it was Merkel’s nod toward moral hazard — she couldn’t give the Greeks terms that Spain, Italy, Ireland, Portugal or the Baltic states might soon want. But in practice, it was a sop to the German right, which was growing ever more disgusted at consecutive Greek governments, which haven’t had the strongest reform record.

But Schäuble makes Merkel look relatively welcoming. The 72-year-old finance minister, according to reports, apparently asked Greek negotiators how much money it would take to get them to leave the eurozone.

From eurozone enthusiast to grump

For years, Schäuble served as the right-hand man to long-serving chancellor Helmut Kohl, who engineered German reunification and who, along with other European leaders of the era, formed the single currency through the Treaty of Maastricht in 1992. But a falling-out with Kohl, who refused to step down as chancellor until after the CDU lost power in 1998 elections, hurt Schäuble’s chances of winning the top office. The relatively junior Merkel won the CDU leadership in the wake of a Kohl-era spending scandal, leapfrogging Schäuble. Though Schäuble has served dutifully as interior minister and, since 2009, finance minister, in Merkel’s three governments, he hasn’t spoken to Kohl in years. Schäuble, now 72 years old, has spent the past 24 years in a wheelchair after a would-be assassin’s bullet paralyzed him.

It’s stunning, to say the least, that Schäuble — who helped give birth to the single currency — is now the hard-liner pushing for German interests and to cut Greece loose. Though Schäuble argues that the euro will be stronger without Greece, no one knows what damage a ‘Grexit’ precedent could serve to European monetary union. Could Portugal be forced out too if its economy gets bad enough? If Greece returns to the drachma and enjoys a quick recovery, will other countries actively seek to leave the eurozone?

Plenty of economists warned at the outset that a single currency would not work without the kind of political, banking and fiscal union that could harmonize tax and spending policies, create a EU-wide banking system and provide for the kind of transfer payments from wealthier to poorer states, in the same way that New York and California subsidize places like Mississippi in the United States. Schäuble presumably heard these criticisms to the single currency in the early 1990s and didn’t object. Nor has he (or Merkel) pushed for the kind of deeper integration that could make the eurozone function more easily for southern European countries. Italy’s GDP, since 2000, has reached 2% growth just once in the past 15 years, and southern Italy languishes in economic misery even worse than Greece’s. Yet Schäuble perpetuates the empty, ugly stereotypes of a parsimonious, industrious northern Europe and a lazy, debt-ridden south.

Schäuble might easily try to demand humiliating concessions from Tsipras that are politically untenable for SYRIZA, thereby sabotaging a final deal. If so, there are plenty of folks in Germany who surmise that Schäuble’s bitterness at having been passed over for the chancellery infuses his policy views today.

Tsipras caves — but will Germany respond?

Tsipras’s latest proposal, which would introduce up to €13 billion in tax increases and pension reform on an austerity-stricken Greece, is essentially the same package on offer two weeks ago before Tsipras rejected it and put the terms up for a vote in a referendum — less than a week ago, Greek voters flatly rejected those terms by a margin of over 61% to 38%. Many of those voters already feel violated — the Twitter hashtag #ExplainNotoTsipras crested as news of the latest proposal broke.

It’s not a total capitulation. Tspiras has transformed a five-month extension into a new three-year program, and he’s forced the issue of debt relief to the forefront. Even if Tsipras is trapped in another austerity straitjacket, he will have won the begrudging acknowledgement from many Europeans, including European Council president Donald Tusk, and from top US officials, that Greece will simply never be able to handle its debt burden, forcing the issue of debt reilef (if not now, soon enough). Hints from Commission president Jean-Claude Juncker that humanitarian aid could follow suggest that many EU leaders realize that the approach of the past five years has not worked.

Nevertheless, German officials are already signalling that they will demand tougher terms in the hours ahead — or that the basis for a deal still doesn’t exist:

Taking a cautious line, Chancellor Angela Merkel’s spokesman Steffen Seibert, told reporters that Berlin had “taken note of” the last-ditch Greek reform plans presented to creditors overnight.

“We cannot comment on their content yet,” Mr Seibert said. “We will wait until the institutions examine them and express their opinion,” he said, referring to the European Commission, European Central Bank and International Monetary Fund.

That’s in contrast to the sudden emergence of Hollande and the French dream team, which even dispatched officials to help the Tsipras government draft its latest proposal. If a last-minute (and, 10 days after Greece defaulted on its IMF loan, with banks and the Athens stock market closed for nearly two weeks, it really is last-minute) deal happens, Hollande will receive much of the credit for facilitating that deal. Ironically, that might be a high point in the presidency of a leftist technocrat whose popularity ratings tumbled as he attempted to bring French spending in line with European fiscal targets hasn’t exactly boosted employment or incomes.

The Greeks and the EU negotiators will continue to tussle over the latest proposal. But over the next 36 hours, the most important debate over the country’s fiscal and economic future will be the one that takes place, directly or indirectly, between Merkel and Schäuble.

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