A Tale of Two Compromises: How Germany let Greece into the Euro

by K J D McCarthy

On Monday 21 September 2015, Alexis Tsipras took a civil oath as Prime Minister of Greece for the second time in less than a year. With 35.5% of the vote, the Syriza Party (now minus its more contentious Marxist elements under former Energy Minister Panagiotis Lafazani) may not have won the overall majority it sought but did capture a slender parliamentary majority alongside its former junior coalition partner, the nationalist and relatively right-wing Anel. Following Tsipras’ first brief term, which saw the formerly inflexible PM agree to a “painful but positive” €86bn bailout deal, ‘compromise’ has become the mot du jour. Indeed, Tsipras’ until recently unheralded ability to prevaricate has resulted in former adversaries within Chancellor Angela Merkel’s cabinet, such as Deputy Finance Minister Jens Spahn, terming Tsipras “a very strong leader for reforms” while the Tsipras himself simultaneously attempts to diminish Greece’s more inordinate obligations under the 12 July Bailout Deal.

One wonders however if it is Merkel, German Finance Minister Wolfgang Schäuble and other European leaders such as French President François Hollande, rather than Tsipras, who should be ruing the consequences of their own governments’ compromises of the past. Throughout the Spring and Summer of 2015, Greece was repeatedly speared by its critics for a failing taxation regime, insufficient economic reforms, public-sector payrolls, and incompetent political leadership, not to mention being subject to the proliferation of the now enduringly ingrained myth that Greece somehow hoodwinked the original members of the European Rate Mechanism (“ERM”)[1] in obtaining an underserved place in the Eurozone. This convenient story has provided Germany et al a second stick with which to beat the Greeks (i.e. not only did you fail, but your failure is entirely your own fault). Its proliferators, however, do history no justice in disregarding their own ill-considered contribution to Greece’s Eurozone tragedy.

The factual basis for these allegations runs as follows. Greece entered the ERM in March 1998, only 9 months before the other 11 members’ currency values were frozen in order to establish the European Currency Unit (later, the ‘Euro’). Not one of these members had joined the ERM later than 1996, giving their currencies and economies plenty of time to adjust to the +/- 15% allowed rate of fluctuation prior to the establishment of the single currency. Greece on the other hand, was at this time still battling 5% inflation while the government of Prime Minister Costas Simitis had contemplated a 20% devaluation in the Drachma as late as early 1998. Moreover, Greece failed to meet a crucial fiscal criteria laid down in the Protocol on Convergence under Article 109j.1 of the 1992 Maastricht Treaty (commonly known as the ‘Stability Clause’) when joining ERM II (the new exchange-rate agreement entered into by the prospective Eurozone members following the freezing of currencies on 1 January 1999); namely that its budget deficits exceeded 3% of GDP while its national debt remained far about the agreed cap of 60% of GDP.In fact, Greece’s debt has never even been within 30% of the cap.

As the story is told, it is unsurprising that the Greek negotiators in late 1997 and 1998 struggled to convince skeptics like Germany’s Helmut Kohl, the UK’s John Major, and even Italy’s technocratic PM, Romano Prodi, that the Drachma should receive a relatively slight devaluation of somewhere below 10%. Kohl’s government in particular found this implausible, with influential Deputy Finance Minister (later Director of the ECB), Jürgen Stark, demanding a devaluation in excess of 20% along with extensive reforms of the public sector. Despite the Drachma coming under repeated assaults in the markets by speculators during the course of Spring 1998, Greek Central Bank Governer Lucas Papademos could not convince Bundesbank President Hans Tietmeyer on either the key questions of accession criteria or inflation targets following entry. Greece’s Euro adventure looked set to hit the rocks.

But that, as we all know, did not happen. Notwithstanding Kohl’s criticisms, and Greece’s shaky public finances, the argument to reject Greece was already holed below the water line long before by two of Kohl’s gravest policy errors. At the 1996 Dublin Summit, he had acquiesced to Chirac’s demands that there be no automatic imposition of fines for a breach of the Stability Clause, while a year later, he had endorsed Italy’s and Belgium’s entries to the ERM despite Belgium’s vast debt burden (131% of GDP), and Italy’s breach of the budget deficit rules (8.2% deficit in 1997). When Greece challenged Germany on its own entry to the ERM, Chirac reminded Kohl of France’s earlier commitment to German reunification only on the basis of Germany standing in a strong European community brought together in monetary union. Either Greece was in the ERM, with a later shot at Euro membership, or Germany would be politically isolated in Europe.

On 23 April 1998, when Kohl rose in the Bundestag to confirm his support for the coming introduction of the Euro, he confirmed his desire for “politically acceptable stability”. For Greece, the last obstacle to its joining the Eurozone had collapsed. Although it would take until 2000 for Athens’ budget deficit to (purportedly) fall within acceptable guidelines, Greece’s accession had been guaranteed by Kohl’s compromise between political unity and economic stability.

Kohl’s earlier statements that “the Maastrict criteria must be met at all costs” gave his later capitulation an almost Tsipras-ite quality. The compromise was then compounded by the incoming Greek government’s 2004 admission that Simitis had “adjusted” the 1998 budget deficit by up to $2bn, resulting in an amended deficit of 4.7%, far above even Kohl’s “politically acceptable” stability criteria. Here too, though, the Greeks are not entirely to blame. The restatement of accounts was mainly the result of the Simitas Government’s decision to count subsidies for state entities as equity purchases, a device Germany itself had previously allowed when approving Spain and Portugal’s entrance to the ERM, two years before Greece’s own accession.

Greece’s own misfeasance and inaction certainly contributed to its economic demise, but there can be no doubt that Merkel’s party, the Christian Democrats, led by the “Unity” Chancellor Helmut Kohl, paved the path that took it there. So the next time Tsipras’ equivocating draws a withering glare from Schäuble at a Eurozone crisis meeting, perhaps the German Finance Minister should be reminded that one poor compromise deserves another.


K J D McCarthy is an international lawyer based in Paris. His interests include history, politics and discussing the finer points of test rugby tactics from the safety of his armchair.


[1]   Fixed exchange-rate system employed by the original pre-Euro ‘Eurozone’ members in reducing currency fluctuations prior to the physical introduction of the single currency in 2001. Membership of the Euro from 1 January 1999 was made conditional on prior membership of the ERM for a period of at least two years.

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