Germany's brinkmanship over Greek economic woes could prove damaging

They should beware of pressing too hard for reforms – or assuming that they know best about what economic medicine Greece needs so as to recover

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The Independent Online

In ancient Greek legend Icarus flew too close to the sun. But in today’s eurozone Germany is relaxed about Greece experiencing some searing heat. Despite doing a deal in principle back in February to keep Athens on the bailout drip for a further four months, the €7.2bn (£5.2bn) that Greece is owed has still not been released by the German-led creditor bloc.

The Greek economy is back in recession and tax revenues are dwindling. Without more bailout cash, the Greek government, led by Alexis Tsipras’s Syriza party, will soon run out of money to pay its bills. On Monday it was forced to requisition all the spare euros held by local governments and hospitals. That may buy the country a little time, but it’s a trick that cannot be repeated.

Greece managed to scrape sufficient funds together to repay the International Monetary Fund €450m earlier this month. But another €800m repayment is due in early May. Athens will soon need to choose between using its scarce resources to pay public sector workers and repaying its international creditors. The chances of a party like Syriza – elected on a populist anti-bailout platform – choosing the latter must be slim. That’s why financial markets are exhibiting increasing signs of alarm about the prospect of default, pushing up Athens’s de facto market borrowing costs to levels not seen since the 2012 panic.

Germany’s brinkmanship is calculated. Berlin wants Athens to agree to an irreversible menu of structural labour market reforms and privatisations before releasing the cash. And its ministers apparently feel that forcing the Greeks to stare into the abyss of default – which would precipitate a fresh economic disaster for Greece – is the only way to ensure co-operation.

And if Greece does default? German ministers dismiss the idea of contagion, pointing out that their financial institutions have slashed their exposure to Greece over the past three years. Ministers in Berlin may well be sincere when they say they want Greece to stay in the eurozone. But they want this to be on their own terms. If Greece cuts its own throat by failing to comply – well, too bad.

That is an ill-advised approach for two reasons. First, the financial contagion of a Greek default could well be far more serious than Berlin seems to expect. The lesson from the failure of Lehman Brothers in 2008 is that global capital markets are much more integrated and fragile than they appear on the surface.

“If Greece and the institutions [of Europe] don’t find a path forward, it wouldn’t just be terrible for Greece, it would really be a risk that the global economy shouldn’t want to take,” said a frustrated Jason Furman, the chair of President Obama’s Council of Economics. That is sound advice.

Second, the geopolitical consequences of a Grexit could be dire. If Greece leaves the eurozone, the indications are that it would fall into the embrace of Vladimir Putin’s Russia. Mr Tsipras has met with the head of the Russian energy giant Gazprom. That follows his trip to Moscow earlier this month. At a time when the EU is struggling to present a united front in the face of Russian aggression in Ukraine, a Greek-Russian alliance would be a huge setback for Europe.

Germany and the northern Europeans are entitled to press Greece to commit to serious structural economic reforms. But they should beware of pressing too hard – or assuming that they know best about what economic medicine the country needs so as to recover. Syriza is right when it says European economic policy in Greece since 2010 has been an abysmal failure and that some humility from the mandarins of Berlin and Brussels is in order. Most important, there should be no insouciance over a Greek default. Or history may well record that it was Germany that was flying too close to the sun.