Does Greece Really Need Financial Aid? Will Germany Really Provide It?

EU Business
EU Ready to Give 'Urgent Assistance' to Greece
Merkel Not Opposed to Bilateral Aid for Greece
Europe Waits on Germany as Greece Deadline Looms

Greece is still trying to figure out how to recover financially after its prime minister revealed late last year that the country’s finances were much worse than previously disclosed. Since then the country has proposed certain austerity measures that would help rectify its financial stress, namely spending cuts and tax increases that would bring its deficit back in line with other EU members. Fear remains, however, that Greece’s austerity measures are not enough to cover the EUR 50billion in bonds that will roll over this year because Greece’s cost of borrowing has increased dramatically to more than double the rate that investors are willing to pay for fellow EU member Germany’s financially attractive bonds.

To help with its fiscal crisis, the EU Commission is ready to enact plans that provide Greece with concrete financial assistance. EU Commission chief Jose Manuel Barroso has been putting pressure on Angela Merkel, German Chancellor, to approve an aid package that will be proposed to the 27 heads of state and government in an EU summit in Brussels next week. The proposed aid would come in the form of bilateral loans that avoid the limitation in the EU’s Lisbon Treaty that prevents bailout loans to any euro country. The bilateral loans would come from multiple European states, not limited to Germany.

Merkel’s stance on the matter has been fickle and seemingly adaptable, depending on her audience. While she isn’t altogether opposed to assisting Greece, she doesn’t think it is absolutely necessary at the moment. Last week she said that she would rather see the Greece obtain assistance from the IMF. This position represents a more nationalistic view that discourages Germany, a cash-rich country, from bailing out weaker EU members. German residents and politicians have clearly voiced their opposition to bailing out weaker EU members who were, ostensibly less fiscally responsible. Radical Germans have suggested ejecting Greece and other weaker members from the European Union and welcome the return of the Deutschmark if weaker countries drag the euro down. Despite the opposition, this week Merkel was quoted as telling Prime Minister Papandreou she would do “everything necessary to preserve eurozone stability,” which would seem to include a Greek bailout.

Prime Minister George Papandreou’s stance on a Greek bailout has also been somewhat inconsistent. Saturday he pleaded for help from EU member states, suggesting that the political support will help reduce its rate of borrowing and allow it to recover without destabilizing the rest of the European Union. On Sunday, however, he specifically confirmed that Greece is not in need of any financial assistance. Lining up political opinions with actual financial policies appears to be the biggest hurdle in organizing a path of financial reform for the struggling Greece.

Discussion Questions:
1. If the EU members bail out Greece, how will the union enforce fiscal discipline among its membership going forward?
2. What form of rescue funding will be least painful for the Greek people; an IMF loan or bilateral loans from other EU members ?