Germany: Threats of Evictions from the Eurozone
Teaser:
German Chancellor Angela Merkel wants the eurozone to be able to vote out members who repeatedly fail to comply with governing fiscal rules.
Analysis:
German Chancellor Angela Merkel said March 17 that the debt problems currently facing the eurozone needed be dealt with at their roots, adding that the eurozone must have the option of <link nid="156993">removing from the currency bloc</link> member states who repeatedly fail to comply with governing fiscal rules.
Merkel's words are even harsher than those of German Finance Minister Wolfgang Schauble, who in a March 12 editorial said that states that fail to narrow their budget deficits and regain competitiveness "should, as a last resort, exit the monetary union." Whereas Schauble suggested such members should leave the eurozone, Merkel explicitly called for means to vote them out. Furthermore, while Schauble's suggestions have drawn attention mostly by Europe's technocrats, Merkel's words carry far more political weight and will ring loudest in Athens' ears.
The proximate cause for Merkel's sobering words likely was the Eurogroup (the group of the eurozone's finance ministers) meeting March 16, at which Luxembourg Prime Minister and Eurogroup President Jean-Claude Juncker suggested the most official and explicit bailout plan for troubled eurozone member <link nid="155915">Greece</link> to date:"What will happen if necessary, and we're still convinced it won't be necessary, is that we'll reach an agreement in the eurozone to offer bilateral support in a coordinated form."
The plan is still very vague, but Juncker's comments do confirm that there is a plan to <link nid="154066">provide Greece with bilateral financial assistance</link> if the need arises. As STRATFOR has emphasized, the eurozone's Greece strategy is to resolve the problem in the cheapest, least politically difficult way possible. The eurozone (read: <link nid="153976">Germany) has therefore supported Greece with political statements, but has refused to explicitly outline a bailout plan or put a number on a package. The idea is that merely implying a bailout would sufficiently ease markets and financing conditionsenough toobviatethe need for an explicit one. The strategy allows Germany to keep Greece on the path of fiscal reform by injecting a degree of uncertainty, while retaining the bailout option as a last resort.However, now that there is some sort of agreement on financial assistance, Germany is back to the classic carrot-and-stick routine, except that this time the "stick" is not merely deficit procedures -- it is removal from the eurozone.
Providing financial assistance to Greece is utterly verboten in Germany. Merkel's pronouncements about the eurozone's need for an option to release a member from the bloc are therefore a reminder that while bilateral support ostensibly is on the table, Greece does not want to have to call upon it. (so if Greece asks for support to fix its economy, Germany will try to boot it out of the eurozone for not fixing its economy on its own?)Well if the threat is that a country would be booted if they repeatedly don’t comply with the rules, under what scenario could you need a bailout but NOT have repeatedly broken the rules?
However, given the practical hurdles of actually creating such a mechanism, Merkel and Berlin’s fiery rhetoric and tough talk about booting a member from the union should is just as much about scaring Greece and the rest of “Club Med” straight as it is about proffering hyperbole for domestic consumption. Actually establishing a mechanism by which to kick a eurozone member from the currency bloc would require amendments in a new treaty that would have to be renegotiated and agreed upon by all 27 member states. Not only would that take an enormous amount of time (if history is any guide), but there are many powerful EU members -- such as Italy and Spain -- whose fiscal situations are not altogether unlike Greece’s, and who could (and would want to) scuttle any such new treaty.