Chris Mahony: German politics add to Euro woes

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Angela Merkel has a strong domestic agenda, writes Chris Mahony

Even though continued economic decline caused by Greek, Spanish and Italian pain will only make the situation worse for all of Europe, it doesn't do so in the short term, at least not in the mind of your average German. As I got out of a taxi in Athens on Monday morning, I asked the driver for a receipt.

"Is you German?" he laughed. "Only Germans want receipts - Greeks don't need them."

It's this blase attitude that Germans cite when claiming Greece must be accountable for its debt.

On Sunday, the New Democracy party won the largest share of the vote in Greece's election. It's the same party that cooked the Greek Government's books, with help from Goldman Sachs, to get into the Eurozone.

On Thursday, it formed a right-wing coalition with the Pasok and Democratic Left parties. Together they seek to keep Greece in the eurozone by continuing the austerity that the European and IMF bailouts require, much to the short-term relief of international financial markets.

When explaining Greek attitudes towards tax, many historians point a finger at Turkey.

Their rationale: Greeks refrained from paying tax so any Turkish invasion would not capture a lucrative government.

The need to create a non-tax paying economy ingrained attitudes that lingered beyond the decline of the Turkish/Ottoman threat.

Wealthy Greeks in particular have avoided paying tax, while the Government has wooed voters by providing goods and services it can't afford.

The structure and implementation of the eurozone has exaggerated the extent to which capitalism and consumerism pushed Greece toward this crisis.

The taxi driver's German-made car tells us a lot about why Germany wanted Greece (and others) within the Euro to keep borrowing money - to pump up demand for German products.

While the Germans claim that Greece lied to get into the eurozone, they also failed to do proper due diligence on Greece's financial position.

Even when Greece admitted that its yearly budget deficits exceeded the 3 per cent of GDP limit, it was not punished. Why? Because Germany and France were the first to break that rule, without repercussion.

The absence of punishment tempted eurozone governments to recklessly borrow cheap money, often encouraged by German and French banks.

In effect, Greek demand was stimulated by the non-enforcement of a budget rule and access to cheap euro money. The Greeks built airports and subways and bought more Mercedes.

Were Greece to default on its debts, French and German banks would lose €20 billion ($31.8 billion) and €4.5 billion respectively.

The German solution - that the Greek Government honour its debt burden by engaging in austerity - is more unpopular with young Greeks than old.

Older Greeks enjoyed the benefits of inflated Greek demand, and younger Greeks believe they're being left to deal with the consequences - perpetual economic decline, thanks in part to the effects of austerity.

The sight of heavy police deployment around Athens demonstrates the fear of youth reaction.

Yet older Greeks voted back the party that cheated Greece into the eurozone, and its coalition partner, Pasok, which negotiated the bailout terms.

Unlike Greece, but like New Zealand, problems in Spain and Italy stem from private rather than government debt.

Yet the German approach, as in Spain's recent bailout lends money to the Spanish Government, which then forwards it on to struggling Spanish banks.

This intermediary role means the next generation of Spanish wage earners is going to pay for the life of its predecessors.

Germany refuses to allow Europe as a whole to bail out Spanish banks directly, even though the fiscal health of Europe as a whole could accommodate this. So why is this not happening?

It's the politics, stupid.

German Chancellor Angela Merkel knows that allowing Europe, including Germany, to directly bail out Spanish banks would go down poorly with the German public.

Even though continued economic decline caused by Greek, Spanish and Italian pain will only make the situation worse for all of Europe, it doesn't do so in the short term, at least not in the mind of your average German.

Unfortunately, the short-term is what a democratic election cycle demands Merkel to focus on.

The question now is whether new French President, Francois Hollande (who came to power promising an alternative approach), can convince Merkel to either persuade German voters, or take the political hit for the long-term good of Europe.

Otherwise a catastrophic event may be required.

* Chris Mahony is deputy director of the New Zealand Centre for Human Rights Law Policy and Practice at Auckland University's faculty of law.

- NZ Herald

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