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Tuesday 22.08.2017 | Name days: Rudīte, Everts

Why Germany doesn’t want to kick Greece out of the euro

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A new report suggests that German Chancellor Angela Merkel is now leaning toward bailing out Greece yet again. The prospect of a Greek exit and a euro zone implosion has become too frightening — German officials call this the «domino theory».

Angela Merkel

Yet helping Greece out is a tricky situation in itself. For one, further bailouts won’t sit well with German voters. What’s more, Europe’s leaders might have to fudge a few numbers to make it look like Greece is actually meeting its debt goals, writes The Washington Post.

Greece still carries a high debt to GDP ratio of around 150 percent. Back in March, the European Community, the European Central Bank and the International Monetary Fund (IMF) — the so-called “troika” — got together and approved a new $170 billion rescue package for Greece. In return for the aid, Greece was supposed to carry out a series of steep austerity measures and shrink its debt to 120 percent of GDP by 2020.

The betting line is that Greece won’t meet that target.

The Greek government under Antonio Samaras recently proposed a package of pension cuts and public salary reductions worth $14.6 billion next year. But repeated layoffs and cutbacks are unpopular in Greece. If Samaras pushes too hard with cuts, his center-left coalition partners will balk and the government could collapse. And the main opposition party, Syriza, wants to tear up the bailout agreement altogether.

Up until this point in time, Merkel and her finance minister, Wolfgang Schäuble, were seen as supporters of the “chain theory.” According to this theory, the monetary union is a chain in which each individual country forms a link. Since Greece is the weakest link, if it leaves, as the theory has it, the chain will become stronger overall.

But since this summer, the majority of Merkel’s advisers have now become supporters of the “domino theory,” which postulates that the monetary union would not become stronger if Greece exits. On the contrary: If Greece falls, one country after the other could then be in danger of toppling.

Indeed, many analysts have worried about just this aspect of a Greek exit. First Greece goes. Then the financial markets start betting that Portugal or Spain or Italy will be next. All of the sudden, few investors want to lend those countries money. Bank runs commence. Spain decides it has no choice but to leave as well. At that point, the euro implodes. This domino scenario isn’t inevitable, but it’s realistic enough that German advisers are jumpy.

Now it sounds like Merkel, too, is ready to support the Greece bailout plan. The tricky part, for Merkel, is selling this to German voters.

Ref: 110.110.110.1927


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