Renegotiation of Greek bailout would be dangerous, says Weidmann
By Tom Ellis
The new Greek government that will be elected on Sunday is bound by existing agreements and if it decides to unilaterally opt out of the program, that would mean the end of further financial help to Athens, says Bundesbank President, Jens Weidmann, in an interview with Kathimerini. He calls a one year extension of the program a “political decision” that would have detrimental consequences for the EU, and adds that one must not be blackmailed by a country because of the contagion effects.
In the interview jointly conducted with Corriere della Sera, El Pais and Publico, Dr. Weidmann dismisses the Obama administration’s pressure on Berlin to follow a more expansive policy in order to boost growth.
In Greece, there’s a lot of debate about the need to renegotiate parts of the program. Is there space to make some changes?
The key point is that there is an agreement that all involved parties including the Greek government have signed. If the agreements were now seen as being open to renegotiation, then for instance the Portuguese prime minister would have difficulties facing his parliament and explaining that he is to implement reforms. I think that would be a very dangerous strategy. It would harm those countries that are implementing reforms very quietly.
One of the leaders of the two parties that could win says that the Greek government would request a total change of the program. What response would a unilateral move from Greece create?
Who will be elected in Greece is a democratic decision that we all have to accept. But also the newly elected Greek government is bound by existing agreements. If it unilaterally opted out of the programme, it would mean that in my view the basis for more financial help will no longer be given. Greece would have taken its decision but would also have to bear the consequences. We will all be affected, but my assessment is that Greece will be worse off than everybody else.
Have you prepared any contingency plans for a Greek exit?
I don’t talk about contingency plans. I will just reiterate what I have already said. The repercussions of such a decision in Greece would certainly be worse for Greece than for everybody else. The result of potential contagion effects cannot be that one accepts whatever a government has unilaterally decided.
So, if they don’t fulfil the agreement, this leads to an exit?
Not fulfilling the agreement leads to the end of funding. And this may have repercussions on their chances of remaining in the euro.
Looking back, do you feel that the introduction of the euro in Greece was a mistake?
You certainly remember the very controversial debate at that time, with some scepticism in Germany. But it was definitely a mistake that Greece did not make wise use of the benefits of our common currency. The progress observed especially in public finances in the run-up to EMU proved treacherous.
Some say that Greece can go bankrupt, but stay in the euro. How does the Bundesbank view such a scenario?
The fact of the matter is only Greece can decide on leaving the euro, despite this not being foreseen in the EU treaty. As I said before, it will be very difficult for an insolvent country that is cut off from financial support to remain in the EMU.
Is a one year extension of the program acceptable?
That’s a political decision that would have detrimental consequences for the Union at large.
How long should the ECB provide liquidity to the Greek banks?
Our statutes say that we provide liquidity to solvent banks against adequate collateral.
In order for the Greek debt to be sustainable, economists say that there will need to be a haircut of the official sector too.
The peak of the Greek debt is still to come and it will take a very long time to bring it finally to a sustainable status. But here I have to rely on the debt sustainability analysis that has been carried out by the Troika.
How would you assess the term as PM of Mr Papademos, a former fellow central banker?
He is an excellent economist, has a brilliant mind and is somebody I trust. He was instrumental in signalling Greece’s desire to change track and embark on reforms.
How do you asses President Obama's emphasis on the need for growth and a more expansive policy?
We have to recognise that the recession we are seeing in many countries is the result of alack of confidence in public finances in combination with an erosion of their competitiveness. There is no easy way out, unless you address the root causes of these problems. And addressing this situation by adding further debt through fiscal stimulus is certainly not the solution.
Is the US totally wrong?
Sometimes one has the impression that all of a sudden some realised the importance of growth. But the adjustment programmes are all centred around growth. We have to be honest in this debate. What the protagonists of this discussion mean is publicly financed stimulus packages. And this is something different. Perhaps it will lead to a short-lived expansion. But it will aggravate our problems in the future, because it will create additional debt, and there are already doubts about debt sustainability. Credit-financed excessive demand was part of the problem, for example when we talk about the housing boom in Spain.
Financed by German banks…
Financed by whoever. I am not discussing the question of who is to blame. I am saying this is an unsustainable situation
What about the growth compact? The Chancellor has spoken about it.
Our problem in Europe is raising the growth potential. If we debate a growth compact it should be focussed on long-term growth and therefore on structural reforms. This is also what Mrs. Merkel has in mind.
And what about project bonds?
To do what?
For infrastructure, for example.
For infrastructure? I am not convinced that Spain and other countries suffer from alack of infrastructure. What I am missing is an adequate analysis. If there is an impediment to investment, for instance in Greece, there is rather too much red tape and an inefficient tax system. I don`t believe in further stimulus programmes to cushion the adjustment process.
But why not? We have 25% unemployment in some countries.
To give a perspective to the younger generation, you have to tackle the roots of the problem. Spain, for instance, had double-digit unemployment rates before the housing boom. It’s about the structure of the economy, not about some temporary stimulus.
But you don’t have only one country in recession, but many countries and actually the whole euro area. So how can we look for growth in the long run?
But look at Portugal's forecast, for instance. It is forecast to have a positive growth rate without any further stimulus.
We can discuss if that is realistic. In Greece and elsewhere, forecasts are changing to the worse.
Some effects from the reforms that have been implemented are already showing – in unit labour costs, in competitiveness, in export growth. I would not endanger this by deviating now from the course and jeopardise the confidence in the long overdue policy change.
But if Greece leaves the euro, what happens to Portugal and the whole euro area? Isn’t that a bigger risk than continuing to finance Greece without conditionality and having the risk of the Portuguese government asking for the same?
I think we agree that both risks are substantial. Of course, I don’t want to speculate about any country leaving the Eurozone; we haven’t seen this yet and this would be a very grave event. And that’s why I’m counting on the Greek government to stick to its agreements. That’s my preference.
And which are the other risks?
One major risk is that the stability foundation of the monetary union, that we have agreed on and enshrined in the articles of the EU treaty, will erode further. This has the potential to undermine the confidence in the solidity of the monetary union. And it would put monetary policy under pressure even more to inflate away the problems. Already now several voices are asking the ECB to break its rules and bail out with no conditionality.
Does the European Union have enough firewalls in place to deal with a Greek exit?
I don’t want to speculate about a Greek exit. The firewalls we have been building and strengthening are there to prevent contagion effects. And I will not be a party to the endless debate on their size. In any case, we must not allow ourselves to be blackmailed by a country because of the contagion effects.
Regarding Portugal, it seems to have the image of the good student in the bailouts program, but it’s also a hostage to what happens in Greece and Spain. What message would you leave to the Portuguese government?
The key message from Portugal and Ireland is that adjustment programmes work. The reforms that have been implemented there have contributed to reducing unit labour costs and stopped the decline in competitiveness. We also see the first benefits of this in the current account deficit. And according to our forecasts, growth should pick up again in these countries. No serious forecast sees a downward spiral that doesn’t end anywhere.
There are already talks about a second bailout to Portugal, because the country may not be able to return to markets next year. How do you regard this?
We are dealing with a crisis of confidence, and lost confidence cannot be regained overnight. But the important message is that Portugal is on the right track.
But isn’t the whole of the euro at stake?&?nbsp;
Confidence has also been lost in the functioning of monetary union as a whole. This brings us back to the debate about whether we want to return to the Maastricht framework, which relies on national fiscal policies that are responsible only for themselves, or whether we want to take a quantum leap forward, regarding integration. We cannot say that, on the one hand, we rely on national fiscal policies and on the other hand, we progressively communitise risk without control, thereby undermining the existing legal framework. In the end, it’s always a question of the balance between common liability and control.