Debate over how to deal with Greece’s financial crisis is becoming heated as members of both the German government and the European Central Bank are becoming increasingly concerned about the continuing devaluation of the euro and the best way to buoy the Greece’s economy, and in turn the rest of the EU, without lowering themselves in the public’s estimation.
German finance minister Wolfgang Schäuble believes that making private-sector creditors share in the cost of a new bailout package for Greece is the only way of securing parliamentary approval, while the ECB is completely opposed to any form of restructuring Greece’s debt because creditors would perceive restructuring as the equivalent to default.
The “selective default” that the ECB is worried about would likely spread to other heavily indebted countries like Portugal and Ireland, resulting in more situations like that of Greece. Jens Weidmann, the new president of German Bundesbank, is opposed to any further central banking help for Greece, including the securing of a maturity extension for Greek bonds already held by the ECB and other national central banks, even though he is aware of the catastrophic effect it might have on the Greek economy.
So ultimately it’s a battle between the ECB and the German government, and the government seems likely to be the victor. The ECB lost credibility in the eyes of the public when former Bundesbank head Axel Weber withdrew from the race for presidency back in February. The ECB has also made a series of policy reversals, the latest of which will likely be the modification of its line on restructuring under pressure from the government, hurting its reputation for independence from government intervention. The ECB may also have to ask for more money from the European finance ministries should any Greek loans go into default, making them appear hypocritical after emphasizing the importance of governments being tough on budgetary issues so as not to require assistance in balancing their budgets.
Klaus Regling, the German Finance Ministry official and head of the European Financial Stability Facility rescue fund, has already indicated that Greek debt will indeed be restructured, despite the ECB’s current refusal to do so. Even Jean-Claude Trichet, the current ECB president, doesn’t seem to think they’ve had the last word on restructuring, acknowledging that “the people of Europe” will have their say and that the ECB isn’t quite the sovereign power it was once meant to be.