Against all odds, German Chancellor Angela Merkel secured an 11th hour bailout for Greece on July 21st to avoid a sovereign debt crisis that threatens to repeat itself in Italy and Spain and perhaps undermine the single currency euro zone. Greece didn’t want to call it a Marshall Plan so perhaps it should be called the Merkel Plan.
The German Chancellor pushed the 17 European Finance Ministers attending a summit in Berlin to accept a €109 billion bailout in contributions from member states, the IMF (International Monetary Fund), and – Merkel’s key demand - a “voluntary” contribution by private banks and investors. Private sector creditors will thus share the cost of the bailout, putting Greece in a restricted default by accepting lower interest rates and longer repayment terms.
Merkel told reporters “all of Europe has undertaken reforms that a year and a half ago would not have been conceivable”. She pointed to the higher retirement age in Spain, the sale of state-owned assets in Greece, savings packages in Ireland and Italy and a new commitment by France to bring down its budget deficits
French President Nicolas Sarkozy, who worked on the plan with Merkel, described it as an historic moment saying, “Our ambition is to seize the Greek crisis to make a quantum leap in euro zone government.”
The plan would create a new European Financial Stability Fund (EFSF), a sort of European IMF, heavily funded by Germany, whose taxpayers would provide 27 per cent of its resources. Those Germans who approved of Merkel’s insistence on private bank participation in the bailout as punishment for having lent to Greece in the first place may balk at paying for future bailouts.
The question remains whether Greece –not to mention Spain and Italy - will now accept more pain in the short term by getting to grips with their own spending and deficit problems or whether they will sit back and wait for further transfusions of money from their healthier neighbors.
Even after reduced interest rates and a 21 percent cut in Greece’s debt to private banking institutions, Athens will still be burdened with an unsustainable debt which may eventually require another transfusion.
Whatever happens, the euro zone remains a group with a huge north-south divide, with the southern tier stuck in the no-growth lane, unable to compete in a globalized economy. Growth in the euro zone as a whole seems to have come to a halt, which raises another question: where will the money come from to fund the Merkel Plan?