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C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 000181 
 
SIPDIS 
 
STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA 
(WHITTINGTON), DRL/ILCSR AND EUR/CE (SCHROEDER, HODGES) 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR SMART, ICN (NORTON), IMB AND OASIA 
SIPDIS 
 
E.O. 12958: DECL: 02/12/2020 
TAGS: EAID EFIN ECON PREL EUN GM GR PGOV
SUBJECT: GERMANY RELIEVED BY EU SUMMIT OUTCOME ON GREECE 
 
Classified By: ECONOMIC COUNSELOR INGRID KOLLIST, REASONS: 1.4 (B) AND 
(D) 
 
¶1. (C) SUMMARY:  Chancellor Angela Merkel's government 
welcomed the decision taken at the EU's February 11 informal 
summit in Brussels not to provide financial assistance, for 
the moment, to cash-strapped Greece.  German officials 
believe a bailout is not needed at this time, and that 
extending a lifeline to Greece would have carried too many 
risks.  One major fear in Germany is that "saving" Greece 
would lead to other needy Eurozone members expecting the same 
treatment.  Another concern is that extending an explicit 
guarantee for Greece could weigh on Germany's own good 
standing in the markets, ultimately raising its borrowing 
costs.  While German government officials do not totally rule 
out an IMF program for Greece if push came to shove, most 
consider this eventuality highly unlikely, especially in 
light of the European Central Bank's strong opposition.  In 
fact, the German government, the ECB and private German 
economists are downplaying the seriousness of Greece's 
predicament and its potential impact on stability of the 
Euro.  They agree, however, that the crisis could have 
longer-term consequences for EU institutions and how they 
interact with member states that stray off course.  END 
SUMMARY. 
 
NOT IN THE MOOD 
--------------- 
 
¶2. (C) Prior to the February 11 EU Summit in Brussels, there 
was much hair pulling in Berlin over the wisdom of 
participating in some sort of Greek rescue.  No one savored 
the idea of explaining to German taxpayers, already concerned 
about Germany's record deficit, that they would be footing 
the bill for the irresponsible behavior of another country. 
A Finance Ministry official explained to us that many Germans 
felt disgusted by the situation in Greece: "While Germans 
have spent the past decade tightening their belts and 
improving their competitiveness, Greek civil servants still 
earn 14 months' salary per year."  A recent editorial in the 
German daily Frankfurter Allgemeine Zeitung (FAZ) asked 
rhetorically whether Germans would need to work until age 69 
just to finance early retirement for Greek workers.  With 
important upcoming elections in the state of North 
Rhine-Westphalia, bailing out Greece would not be a vote 
winner. 
 
OFF THE HOOK 
------------ 
 
¶3. (C) The German government was, in fact, "relieved" that 
the European Council meeting on February 11 decided not to 
put concrete assistance on the table at this time.  Wolfgang 
Merz, Director for European Financial Affairs, German 
Ministry of Finance, told us that while Germany stands ready 
to throw a lifeline if the Greek government truly runs 
aground, Greece currently has access to capital markets and 
needs no outside assistance.  The key to overcoming the 
crisis will be the Greek government's implementation of the 
planned austerity measures, said Merz.  Bernhard Speyer, Head 
of Banking, Financial Markets and Regulation at Deutsche Bank 
(DB) Research, agreed that the EU struck the right balance: 
"The decision gave reassurances that Greece would not be 
abandoned, but kept the pressure on the Greeks by not yet 
putting cash on the table." 
 
¶4. (C) Stepping in with assistance at this point carried too 
many downside risks, according to Merz.  Legal questions 
aside, a German or EU bailout of Greece might have harmed 
Germany's credit worthiness, thereby raising its own 
borrowing costs.  Merz added that a bailout would certainly 
have set a bad precedent for other Eurozone countries, such 
as Spain and Portugal, experiencing similar stresses.  (Merz 
acknowledged, however, that these two countries' problems 
were less acute -- a sentiment echoed by Speyer.) 
 
¶5. (C)Still, there is some skepticism that Greece's austerity 
program will get the country's finances on the right track, 
even if fully implemented.  Merz said an IMF bail out 
remained on the table, despite the official line that the 
 
BERLIN 00000181  002 OF 003 
 
 
situation in Greece could be addressed within the EU. 
 
IMF RESCUE? RESOUNDING NO FROM ECB 
---------------------------------- 
 
¶6. (C) According to Karlheinz Bischofberger, Deputy Head of 
the Financial Stability Department at the European Central 
Bank (ECB), the likelihood that the IMF will be asked to bail 
out Greece is "zero."  Greece does not have a balance of 
payments crisis, so there is first and foremost no basis for 
the IMF to step in. Bischofberger added that apart from the 
damage to the ECB's reputation an IMF intervention would 
inflict, it was uncertain that the IMF could even succeed in 
doing the "political dirty work" of forcing Greece to 
implement a structural adjustment program.  DB Research's 
Speyer concurred, adding that it would undermine the 
credibility of EU institutions to manage a crisis. 
 
REPORTS OF MY DEATH ARE GREATLY EXAGGERATED 
------------------------------------------- 
 
¶7. (C) Talk of a possible break-up of the Eurozone is 
"absurd," according to Moritz Kraemer, Managing Director, 
Standard and Poor's.  He noted that Eurozone membership is 
still seen as highly desirable, and there was absolutely no 
incentive to exit, despite the allure of devaluation.  Any 
country that tried to leave the Eurozone would get hammered 
in the credit markets, exacerbating any underlying structural 
problems.  S and P estimates that Greece's rating in the case 
of an exit would drop to "BB " or lower, i.e. below 
investment-grade.  Even today, Greece's rating of "BBB " is 
higher than it was in 1997 ("BBB-") before joining the common 
currency. 
 
¶8. (C) While the current crisis may have revealed an 
"Achilles heel" of the Eurozone, it may present 
opportunities, according to Klaus Masuch, Head of the EU 
Country Division, Directorat General of Economics, ECB.  The 
crisis is a "healthy warning signal" that Eurozone members 
must conduct "sound national policies in line with the agreed 
rules."  It also underlines the necessity of better 
integration and coordination of member state fiscal policies. 
 The Euro will come out of this crisis strengthened, he said. 
 Better and stricter early warning and surveillance systems 
will be in place, and the Stability and Growth Pact will 
ultimately be reinforced. DB Research's Speyer agreed, adding 
that the crisis could make EU member states proceed more 
cautiously with enlargement. 
 
A EUROZONE CHAPTER 11 
--------------------- 
 
¶9. (C) DB Chief Economist Thomas Mayer told Ambassador Murphy 
he was pessimistic Greece would take the difficult steps 
needed to put its house in order.  A worst case scenario, 
says Mayer, could be that Germany pulls out of the Eurozone 
altogether in 20 years time.  In 1990, Germany's 
Constitutional Court ruled that the country could withdraw 
from the Euro if: 1) the currency union became an 
"inflationary zone," or 2) the German taxpayer became the 
Eurozone's "de facto bailout provider."  Mayer proposes a 
"Chapter 11 for Eurozone countries," which would place 
troubled members under economic supervision until they put 
their house in order.  Unfortunately, there is no serious 
discussion of this underway, he lamented. 
 
COMMENT 
------- 
 
¶10. (C) Chancellor Merkel is clearly relieved she does not, 
for now, have to explain to the public why the German 
government is running up its own deficit to bail out 
debt-laden Greece.  Still, the German government appears 
prepared to step in as a last resort if needed and is 
cognizant that German banks (such as Hypo Real Estate and 
Deutsche Bank) and insurance companies (Allianz) have 
significant exposure to Greek sovereign debt.  The crisis is 
also viewed -- within the German government as well as within 
the ECB -- as a way to exert greater influence over the 
public finances of profligate Eurozone members.  Some 
 
BERLIN 00000181  003 OF 003 
 
 
Christian Social Union (CSU) politicians are even using the 
crisis to promote the candidacy of Bundesbank President Axel 
Weber as next ECB President, arguing that Weber's selection 
would send a signal that Eurozone stability is paramount. 
One way or another, the consequences of the Greece crisis 
seem likely to outlive the immediate situation.  One strong 
possibility is that German influence over policy in the 
common currency area will grow. 
 
¶11. (U) Embassy Berlin and ConGen Frankfurt co-drafted this 
cable. 
Murphy