Germany’s iron lady has several rocks to lean on if she wants to leave Greece to the wolves. The first is the Maastricht Treaty which says that Eurozone nations are not supposed to bail their brethren out.
The more powerful argument she has is that she cannot unilaterally put German’s capital at risk. That may or may not be true, but Merkel can turn to her parliament if she want to seek public anti-Greek sentiment.
Merkel can very simply scuttle the Greek loans by insisting that they be at market rate, perhaps as high as 7%. Greece can barely make the debt coverage on those sums, especially as it raises more capital as the year wears on. The Greek economy is still among the most troubled in Europe. The present turmoil is not likely to help its exports. A cut in wages in the nation will undermine consumer spending.
The most popular reason to avoid a bailout is the “moral hazard” argument. If Greece goes belly up, Spain and Italy will be tempted to take the same route to default on their sovereign obligations. That assume, of course, that they will risk having heavy IMF-like restrictions on their national economies, the equivalent of being in receivership.
Moral hazard is based on a premise that is almost certainly not true that Germany will become the gatekeeper of three or four other nation’s economic activities because it has the power of the purse strings. Germany is not popular enough for its fellow euro nations to go gently into that good night.
Douglas A. McIntyre
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