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The Greek Bailout: Germany’s Pyrrhic Victory

The Greek bailout terms were a defeat for Greece and a victory for Germany, but the costs may be more than the victor can bear.

German Chancellor Angela Merkel after a meeting with Iraq's prime minister in the chancellery in Berlin, Germany, February 5, 2015. (Photo: 360b /

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Alexis Tsipras and his party, Syriza, pulled off an unexpected and decisive victory in the Greek parliamentary elections on September 20. Together with his coalition allies Anel, Tsipras now has a workable majority in the Greek Parliament with which to push through the draconian measures of the latest bailout package. But the real victor was Germany and its eurozone allies, who have insisted all along that democracy can play no part in European Union governance.

With Tsipras’ re-election, Greece’s capitulation to the demands of Germany and its economic allies in the eurozone now appears complete.

Anti-euro parties did worse than expected in the elections. The biggest issue, the terms of the bailout, was a foregone conclusion, and Greeks stayed away from the polls in droves, leading to the lowest turnout in Greek history. Greece’s creditors will sleep easier with Tsipras firmly in charge, but there are ominous signs on the horizon. And Germany’s leaders may well find their victory to be hollow if it leads to a bigger economic crisis and stimulates the spread of nationalist sentiment across the continent.

With Tsipras’ re-election, Greece’s capitulation to the demands of Germany and its economic allies in the eurozone now appears complete. Despite the initial bravado of Tsipras, in the end, Greece acceded to virtually every German demand. The bailout agreement signed in August was even worse for Greece than the opening offer of the Eurogroup finance ministers, clearly a punishment for Greek hubris in expecting negotiations. The defeat of the Greek government’s attempt to address the root causes of the financial crisis has reinforced policies of economic austerity across the continent. Other countries, particularly Spain and Portugal, will think twice before challenging German hegemony within the eurozone.

Tsipras’ sudden transformation from eurozone revolutionary to chief enforcer could be explained by naiveté. Did he really expect the bankers to listen to reason? In Greece, the more prevalent explanation claims he was sold out by Russian President Vladimir Putin. According to this theory, Putin, who had in the past offered massive loans to Greece if it pulled out of the euro, withdrew his offer on the eve of the July referendum in which Greeks overwhelming rejected the bailout terms. Apparently, German Chancellor Angela Merkel offered Putin control of eastern Ukraine in exchange for staying out of Greece, and Putin took the deal. If true, this would be the second time Greek leftists were sold out by Russia. Stalin made a similar deal with Britain and the United States at the end of World War II when he sacrificed communist control of Greece for a free hand in Eastern Europe. Since Russia was really the only political leverage Greece had, Tsipras was left with a choice between signing the agreement or a complete collapse of the banking system. In the end, he was forced to sign an agreement he has no faith in.

The capitulation of Tsipras was a complete victory for the troika of Greece’s creditors. The Third Memorandum structuring a new bailout, passed by the Greek Parliament in August, represents an unprecedented (in peacetime) loss of sovereignty for the Greek state, essentially placing it in receivership. The troika must approve all legislation affecting the economy. In the midst of a severe economic contraction, the troika is dictating even more austerity. Pensions and social welfare programs are to be cut further, until the state achieves a primary surplus. Taxes are to be increased for lower and middle incomes. More markets are to be opened to multinationals, and small businesses will be penalized by requiring them to pre-pay 100 percent of their estimated tax. Foreclosures on primary residences are to be allowed. Among the more onerous demands, Greece is being forced to liquidate state assets, including transportation and communication infrastructure, real estate and energy resources. State property is being auctioned at fire-sale prices. In August, the government was forced to transfer its 14 regional airports to a German state-owned company.

The new agreement is shocking in its brutality. Without some sort of debt restructuring, it has virtually no chance of easing Greece’s economic crisis. On the contrary, it will surely make things worse. Even the International Monetary Fund (IMF) has publicly declared it to be unviable. It will almost surely lead to more economic contraction, social dislocation and government instability. In fact, it is difficult to understand the economic rationale behind the agreement on the part of the creditors. Greece’s debt, already unsustainable, will only increase. Rather than helping Greece achieve financial stability, the agreement seems designed to punish Greece and put its resources up for sale. Many Greeks view it as a coup d’état heralding a new German occupation, this time financial rather than military.

Tsipras and Syriza have accomplished what previous center-right governments could not by co-opting much of the left opposition.

Tsipras defends the agreement by arguing that the alternative, the Grexit, would have been even worse for Greece. His strategy now seems to be to hope for mercy from the troika. Divisions have appeared in the creditors’ ranks, such as the IMF refusal to participate without debt restructuring, which Tsipras will surely try to exploit. It is still possible that the German government will be forced to compromise on debt restructuring and the more onerous terms of the agreement. Ironically, in agreeing to such draconian terms, Tsipras and Syriza have accomplished what previous center-right governments could not by co-opting much of the left opposition. Germany should be grateful. In the best scenario, Greece’s position could also be strengthened by the victory of anti-austerity parties in other eurozone countries, particularly Podemos in Spain, something the Eurogroup is determined to prevent.

Tsipras’ strategy, however, is racing against the clock. Increased austerity will undoubtedly strengthen anti-euro, and anti-German, sentiment. Unemployment in Greece is now higher than it was in the United States during the Great Depression. While anti-euro parties made only minor gains in the elections, among the unemployed, who make up 26 percent of the workforce, anti-euro, nationalist groups on the left and right took almost 50 percent of the vote (including 17 percent for the neo-Nazi Golden Dawn). Those numbers will increase as the economy contracts further and disillusionment grows.

The Greek government is now locked in a death spiral of growing debts and declining revenues, which the bailout agreement only makes worse by precluding measures to stimulate growth. As the center disintegrates, the fragmentation of an increasingly desperate electorate into left and right, and pro- and anti-euro, will make governing Greece, and implementing the agreement, more difficult. Economic collapse and political paralysis could lead to a disorderly Grexit and a disintegration of the Greek state. This worst-case scenario would end up being much more expensive for Germany and the EU.

Even though the latest bailout, like the previous ones, is sure to be an economic disaster, it has been a political victory for Germany. German economic and political hegemony has been affirmed and the Greek people have been punished for demanding more democracy and transparency in EU governance. Germany, however, will find this to be a pyrrhic victory. Unless German leaders are willing to address the roots of the crisis and the incomplete financial architecture of the eurozone, the latest bailout will only serve to intensify the financial crisis that threatens the very existence of the European Union.

Germany’s insistence on austerity is not only destroying the economies of the poorer European countries, but also threatens the fundamental premises of the entire EU project. The EU, as it is presently conceived, can survive only insofar as it fosters a “European” identity and consciousness among its citizens. One of the explicit goals of European integration was to overcome the destructive nationalisms that haunted Europe in the 19th and 20th centuries by promoting transnational solidarity based on a common culture and economy. During the postwar economic expansion, the development of a European consciousness facilitated the development of a single, unified market, which benefitted German industry immensely. Much of that sense of solidarity has been lost during the acrimonious negotiations for the Greek bailout, which were largely conducted through nationalist rhetoric.

The governments of the richer countries like Germany have shown little interest in aiding the poorer countries, even though they are suffering more severely from the global economic crisis. With the inability of the EU to deal effectively with the economic crisis, as well as the refugee crisis, protectionism and nationalism are again on the rise. Germany is in real danger of losing the pan-European political and social solidarity that has long supported German economic power. The strengthening of nationalism has never worked out very well for Europe, least of all for Germany.

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