Schäuble shares ECB’s concerns on Greek debt

The European Union can help Greece but a restructuring of its debt would pose grave risks, German Finance Minister Wolfgang Schäuble said on Thursday, narrowing differences with the European Central Bank (ECB).

Schäuble shares ECB's concerns on Greek debt
Photo: DPA

“It is true that in the European Union we have not yet explored all the scenarios to help Greece,” Schäuble told German business daily Handelsblatt in an interview.

He also acknowledged that “budget discipline measures by themselves cannot resolve the problems” faced by Athens as it struggles with about €340 billion ($480 billion) in debt.

But the finance minister also echoed ECB warnings about risks that could be unleashed by changing terms in the repayment of that debt, narrowing public differences with the central bank that have alarmed analysts and markets.

Such a decision could cause financial turmoil in Greece and elsewhere if investors rushed to get their funds out of the country and feared similar moves in Ireland and Portugal, ECB officials and economists have warned.

Schäuble took care to support the ECB, after media reports highlighted the danger of a clash to investor confidence in the 17-nation eurozone.

“We have always been well-inspired to respect the independence” of the central bank, Schäuble stressed.

Barclays Capital economist Frank Engels said that remark suggested “that the German government would not want to risk an open conflict with the ECB.”

Berenberg Bank chief economist Holger Schmieding warned last week that Berlin and the ECB were headed for “their most serious conflict yet.

“Resolving this conflict ought to be the top political priority in Europe in the next few weeks,” he added.

Schäuble had previously floated the idea of a “soft” restructuring of Greece’s debts, a notion that might involve an extension of the reimbursement period or a lowering of interest rates applied to it.

Markets fear that would lead sooner or later to a “hard” restructuring, under which a substantial part of the money Greece has borrowed would not be paid back.

An aid programme worth €110 billion set up by the EU, the International Monetary Fund and the ECB has forced Greece to adopt austerity measures that will likely curb short-term economic growth.

“There must be medium and long-term growth prospects,” the German finance minister told Handelsblatt, including investments in solar energy and electric power networks.

The floating of such investment in Greece marked an advance from positions by EU leaders that have focused on privatisation of Greek state holdings and economic reforms.

But Schäuble and Chancellor Angela Merkel, who have expressed different positions on the issue of restructuring Greek debt in the past, appear to be reading from the same page now.

Merkel and other EU political leaders have argued in the past that banks must share in the effort of resolving debt crises in peripheral eurozone countries, rather than having taxpayers always foot the bill.

At present, however, she too opposes debt restructuring.

The ECB is worried it could provoke a Greek bankruptcy that would plunge the eurozone into a grave crisis that would be far more expensive in the long run.

The central bank also holds some €45 billion in Greek debt and has lent money to Greek banks against much more in Greek-based collateral, and could thus suffer heavy losses if a restructuring took place.

“We thought it was time that the German government would speak with one voice and show more leadership in Europe on the matter,” Barclays economist Engels said.

“We believe that today’s interview by the finance minister is the first notable and important step in this direction.”


Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


Brussels warns Italy to rein in public spending amid pandemic

Most EU member states should continue to invest to support the continent's economic recovery, but heavily-indebted Italy should rein in public spending, the European Commission warned on Wednesday.

Italian Prime Minister Mario Draghi
Italian Prime Minister Mario Draghi expects the country's GDP to recover in the coming year. Photo: Alessandra Tarantino / POOL / AFP

“The economy is bouncing back from the recession, driven by a rebound in demand across Europe,” EU executive vice-president Valdis Dombrovskis said.

“But we are not out of the woods yet. The economic outlook remains riddled with uncertainty,” he said, warning that the coronavirus is still spreading, prices are rising and supply chains face disruption.

Despite these unpredictable threats, European officials predict a strong recovery, and want eurozone governments to maintain their “moderately supportive fiscal stance” to support investment.

EXPLAINED: How Italy’s proposed new budget could affect you

Italy, however, remains a worry. Its public debt passed 155 percent of its GDP last year, and Brussels is worried that it is still budgeting to spend too much next year.

“In order to contribute to the pursuit of a prudent fiscal policy, the Commission invites Italy to take the necessary measures within the national budgetary process to limit the growth of nationally financed current expenditure,” the commission report said.

The commission did not say by how much Italy’s spending plans should be reduced, and its recommendation is not binding on the government.

The European Union suspended its fiscal discipline rules last year, allowing eurozone members to boost their public spending to help their economies survive the Covid-19 pandemic.

But the European commissioner for the economy, former Italian prime minister Paolo Gentiloni, said governments should now “gradually pivot fiscal measures towards investments”.

“Policies should be differentiated across the euro area to take into account the state of the recovery and fiscal sustainability,” he said.

“Reducing debt in a growth-friendly manner is not necessarily an oxymoron.”

Italian Prime Minister Mario Draghi, a former European Central Bank chief, has said Italy’s economy is recovering after the pandemic-induced recession.

Draghi forecast economic growth this year of “probably well over six percent” in a statement on October 28th.

Italy’s GDP rate grew by 2.6% in the third quarter of 2021.

While economists don’t expect Italian GDP to bounce back to pre-pandemic levels until 2022, ratings agency Standard & Poor has revised its outlook for Italian debt from stable to positive.