Why the German government is already debating relaxing Greece’s austerity targets

By Edward Harrison On Jun 13, 2012

In late April, I wrote a post predicting why the EU is temporarily dropping the 3% hurdle. The gist of the post was that in the euro zone and in Europe more generally, the economy was decelerating much faster than anticipated. To get ahead of the inevitable target misses, the EU was going to have to decide whether to re-double efforts or to relax targets. I felt that the EU would relax targets because of the problems for the Netherlands, Italy and Spain in particular. Now the German press is reporting this will happen for Greece as well under specific conditions.

Die Zeit writes:

Griechenland könnte schon bald ein drittes Hilfsprogramm benötigen. Wie die Wochenzeitung DIE ZEIT aus Finanz- und Regierungskreisen erfuhr, ist das Land bei der Umsetzung seines Programms im Rückstand. Das gelte unter anderem für die Steuereinnahmen und die Privatisierungserlöse. Deshalb wird derzeit in der EU darüber diskutiert, dem Land mehr Zeit für den Abbau seiner Defizite einzuräumen.

Weil sich die Griechen aber nicht am Markt finanzieren können, müssen die staatlichen Geldgeber die Lücke füllen. Aus diesem Grund werde der Bundestag möglicherweise noch im Sommer über ein neues Hilfspaket verhandeln müssen. Im Raum steht ein zweistelliger Milliardenbetrag. Voraussetzung ist aber, dass bei den Wahlen am Wochenende eine Regierung an die Macht kommt, die sich zu weiteren Reformen verpflichtet.

Greece may soon need a third aid package. As the weekly Die Zeit was told by financial and government sources the country is lagging behind in implementing its program. This applies to, among other things, tax revenues and privatization proceeds. Therefore, it is currently being debated in the EU whether to allow more time for the country to reduce its deficits. Because the Greeks cannot get market financing, government sponsors must fill the gap. For this reason, the Bundestag will have to negotiate possibly as early as this summer on a new aid package. The sum is in the double-digit billions. Pre-codition here, however, is that in the elections at the weekend a government comes to power which is committed to further reforms.

So the German line here is that Greece may not be able to make the grade, but that much of this is beyond their control. As a result, Germany is prepared to aid the Greeks if they commit to further austerity.

As I said last month, in the post "The Germans have already blinked", Germany is willing to compromise on core issues causing crisis in the euro area – but only after extracting as many concessions as they can get toward the deflationary policy response that is at the heart of the German economic model. Tsipras is against front-loaded austerity. But he has never come out and said he is against austerity itself per se. Again, as I said last month, "I would bet that Tsipras may even be willing to sign an austerity memorandum that is backloaded if the Germans are willing to go along with this."

So, right now, the ground work is being laid for another Greek bailout. Watch for more on this in the days after the elections this Sunday.