There is a theory wafting through the official corridors in Berlin and Brussels that, once Angela Merkel is re-elected as chancellor next month, she will fulfill the nightmare of the euro zone's bailed-out countries and the fantasy of conservative Germans and deliver Greece to the wolves.
The theory is based on the assumption that Greece, hurtling towards its third bailout, is unfixable and doomed to become an eternal drain on German taxpayers, who have been the single biggest contributors to the €250-billion ($350-billion) in bailout loans pumped in to Athens so far. So why bother writing more cheques? Why expend mountains of political and financial capital on a country that, economically speaking, is a molehill?
The theory is nonsense, for Greece is the crisis Ms. Merkel wants as she and her Christian Democrats go to the polls on Sept. 22. The next Greek bailout will be a classic fudge consistent with her European policy, allowing her to claim that she is, simultaneously, pro-European and the great defender of the interests of the German taxpayer.
But there is more: By superficially indulging the critics of another Greek bailout, she ensures that questions on the real horror scenario – the potential Europe-busting bailouts of Italy and Spain – remain safely off the agenda. Her election campaign began last week and, since then, she has eluded the tough economic questions. In this sense, she is both brilliant and lucky.
The German opposition parties tried hard to turn Greece into a vote-killer for Ms. Merkel, who has a double-digit lead in the popularity ratings, and utterly failed. It started on Tuesday, when German Finance Minister Wolfgang Schaeuble said, "There will be another program in Greece."
His admission made news even though he was stating the obvious. Greece is still in deep recession – its economy contracted at a 4.6 per cent annual rate in the second quarter. A budget deficit of 4.3 per cent of gross domestic product is expected this year. The debt-to-GDP ratio will hit a crushing 170 per cent or more – unprecedented in modern Europe – by the end of 2013. The jobless rate is 27 per cent. The true shocker would be if Greece were to escape a third bailout.
Ms. Merkel handled the bailout questions with her usual cagey waffling. "I cannot say what sums are necessary," she told the SAT-1 broadcaster on Wednesday, adding that "Greece has been making very, very good progress in recent months and we want that progress to be continued."
While Ms. Merkel's predecessor, Gerhard Schroeder, accused her of covering up the true cost of the next Greek bailout, she might not be. There is no doubt Greece will require less financial aid next time around than in each of the previous two rounds because the economy is no longer in free-fall. And with German GDP fattening up again, and exports booming, she can credibly argue that the Greek crisis has not inflicted, nor will inflict, severe wounds on the economy.
Already, the Greek smoke-and-mirrors game is in motion. The maturities on the existing international bailout loans will likely be extended and their interest rates dropped. In effect, the loans are being quietly converted into perpetual loans, meaning they probably will never be repaid in full. This is nothing unique for Greece, which has restructured, or defaulted on, international loans so many times in the past two centuries that you wonder whether it has inspired the regular Chapter 11 bankruptcy filings beloved by U.S. airlines. The last default came only last year, when a "haircut" was given to the Greek sovereign bonds held by private investors, mostly banks.
Since none of the main German political parties want to see a break-up of the 17-country euro zone and the main opposition party, the Social Democrats, has backed previous bailouts, the Greek crisis will go nowhere as an election issue.
Which is not to say that the crisis is gone. Since Ms. Merkel is economically astute, she would also know that Italy and Spain, the euro zone's third- and fourth-largest economies, are the big powder kegs. Of the two, Italy is the one most likely to explode first. It is in deep recession, its debt-to-GDP is 130 per cent and rising, its productivity levels are below those of some countries in sub-Saharan Africa, its manufacturing sector is in ruins and its corruption levels are so gruesomely high and unchallenged that the Mafia is the only Italian institution with a smile on its face.
Toss an unstable coalition government into the mix and and you have a recipe for Italy leaving the euro zone, willingly or not, before Greece, Ireland or Spain – the bailout triplets. No reporter, no opposition politician, no voter has confronted Ms. Merkel on the Italian question. She must be thrilled about the easy ride she is getting on European issues as she sails toward her third election victory.
Greece can be swept under the carpet; Italy and Spain cannot. It's just a question of time before one of those two countries make the Greek crisis look like a fender bender. Too bad no one has the gumption to ask her how she would react to a Group of Seven economy sinking beneath the Mediterranean waves.
Eric Reguly