BERLIN (Reuters) – Anger at Greece’s failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals, with senior politicians now talking openly about the possibility of Athens exiting the euro zone.
Horst Seehofer, the head of the Bavarian Christian Social Union (CSU), was the first prominent figure in Germany to suggest publicly that Greece might eventually be forced to leave the 17-nation single currency bloc in an interview in the Bild newspaper on Wednesday.
But he was expressing what many lawmakers and ministers in the German capital have been whispering behind closed doors for weeks, according to well-informed sources.
German Finance Minister Wolfgang Schaeuble has ramped up his rhetoric since “troika” inspectors from the European Union, International Monetary Fund and European Central Bank suspended talks on payment of a new aid tranche to Greece last week due to backsliding on its deficit targets.
And the Dutch prime minister said in a proposal published on Wednesday that fiscal violators who refused to give up sovereignty over their budgets to a new European “discipline” czar should leave the bloc.
“Countries which are not prepared to be placed under administratorship can choose to use the possibility to leave the euro zone,” Mark Rutte said in the proposal which was sent to parliament.
The troika inspectors are due to return to Athens next week, but their abrupt departure has reinforced the feeling in northern Europe that Greece’s government is simply unwilling to take the draconian steps required to meet the conditions of the 110 billion euro bailout they sealed in May 2010.
In July, European leaders were forced to come up with a second package of roughly equal size for Greece because the first one proved too small. But that second package, due to be ratified by national parliaments in the coming months, is now in danger.
“A debate about a second program for Greece is, in view of the difficulties in the current program for Greece — paying out the next tranche – very premature,” Schaeuble told parliament in a speech on Thursday.
Earlier he called the situation “serious” and said it was “up to Greece as to whether it can fulfill the conditions that are necessary for membership in the common currency.”
German Chancellor Angela Merkel rebuffed talk of a Greek exit earlier this week, warning of a dangerous “domino effect” were the bloc’s weakest member to leave.
There is no legal framework for a country leaving the currency zone and the costs of an exit could far outweigh the pain of staying in.
“As things stand, secession is highly costly and very difficult, and expulsion is impossible,” UBS economist Stephane Deo wrote in a note this week.
He likened the euro zone to the “Hotel California” in the hit 1977 song by rock band The Eagles, which includes the line: “You can check out any time you like, but you can never leave.”
UBS said the consequences of a weak country exiting would include sovereign default, corporate default, the collapse of the banking system and of international trade.
It estimated the costs per person in an exiting country at 9,500 to 11,500 euros in the first year — or 40 to 50 percent of gross domestic product (GDP).
A senior EU official told Reuters that a euro zone exit was inconceivable, because of the turmoil that would ensue.
“No, because if you get 17 minus one, you’ll end up with 17 minus four, five, six or eight,” the official said. “The euro zone is not a cafe where you go in and you go out. The financial and monetary interdependence is so big, so strong.. that the fate of one member creates problems for all of the others.”
He added: “I can assure you that Germany is as convinced as I am that leaving the euro zone is no option at all for anybody.”
But Greece’s failure to meet its targets has raised serious questions about whether weak euro zone countries have sufficient incentive to reform and is an acute, growing source of concern in Berlin.
What incentive does a country like Greece have to meet incredibly tough targets in the face of fierce domestic public anger if it knows that its partners in the euro zone can’t afford to let it collapse financially and allow it to leave?
“If sovereigns in the Euro area believe that they are either too large or too interconnected to be allowed to fail, then there is a significant moral hazard problem,” David Mackie, an economist at J.P. Morgan, wrote in a note on Thursday.
“This has clearly been an issue with the ongoing under performance in Greece, and it became apparent in Italy in August regarding ECB bond purchases. But the music for this dance may be about to stop. The departure of the troika from Athens last week suggests a high level of frustration about what Greece is delivering, and there are now serious doubts about the disbursement of the sixth tranche of the original bailout package.”
(Reporting By Madeline Chambers; Editing by Patrick Graham)
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