Andreas Whittam Smith: Germany has shifted and default is now inevitable

Its agreement with Greece to restructure its economy so that it could grow and repay its debts - thus preserving the euro - has frayed to breaking point

A Greek debt default is close. It could come next week, or very soon anyway. Think of Greece as being in intensive care. You enter the eurozone hospital and go up to the ward where Greece is stretched out in agony. You peer through tubes and pumps at the screens recording the patient's progress. What do you find?

That it could hardly be worse. The returns that investors demand for owning Greek debt have risen to such astronomical levels that the line goes off the scale. Bonds that are due to be repaid next March are priced at half their official value. This is like looking at a thermometer where the mercury has shot up to the top. But more important are the dials that record the performance of the Greek economy. It is shrinking at 7 per cent per annum, making it ever less likely that the country can meet the promises it made to secure bailout funds. Greece is rapidly getting weaker, not stronger and government revenues, the wherewithal for repaying its debts, are shrinking.

The doctors would also say that Greece has never been in good shape. The country entered the euro system on the basis of foolishly optimistic figures supplied by the government at the time. It used the early days of its membership to borrow vast sums at low rates that it could only hope to repay if it achieved fast economic growth, which it didn't. The country still lacks the basic attributes of full statehood. It cannot collect more than a small proportion of the taxes that it levies and it cannot keep its frontiers secure – many illegal immigrants in Europe have arrived via Greece.

These are the circumstances in which next Monday officials representing Greece's creditors are due to come to Athens. They left rather hurriedly a few weeks ago in despair at what they found. Now they are returning to make a final attempt to see whether they can release a further €8bn of the rescue funds that the government needs if it is to pay state salaries and pensions in October. But Wolfgang Schauble, the German finance minister, remarked the other day that the €8bn would not be released unless the Greeks "actually do" what they promised by enacting reforms to modernise their economy.

Taking this warning to heart, Evangelos Venizelos, the Greek finance minister, told Parliament: "Public sector reform is going to happen right now" and the government announced that 10,000 jobs at state-controlled entities would be cut immediately and another 10,000 within weeks. At the same time, a new €2bn two-year property tax was announced. It would be based on surface area and the levy would be collected through electricity bills. Unfortunately Greece's power workers immediately said they would sabotage these plans.

While trades union hostility is unhelpful, the reasons for fearing that Greece cannot avoid default go far wider. An immediate concern is the structure of the second bailout, worth €109bn, agreed by eurozone heads of state in July. It was straight away apparent that there was something wrong with the deal. For even finance ministry officials who signed up to it had a hard time explaining exactly to what they had agreed. Moreover, one important aspect of the rescue package now looks unlikely to happen. The hope was that a high proportion of the holders of Greek debt would agree to accept new securities rather than repayment in cash. This manoeuvre was a sort of disguised default. Had it been carried through, Greece's immediate burdens would have been considerably lightened.

More serious is a recent change of tone in statements made by high officials and senior politicians in the eurozone's paymaster country, Germany. For in addition to Mr Schauble's exasperated comments quoted above, the Economy Minister, Philipp Roesler, suggested over the weekend that Greece would need an "orderly default" on its debts, a remark that sent global share prices tumbling on Monday. And Christian Lindner, General Secretary of the Free Democrats, which form part of the ruling coalition, followed this up in an interview, saying: "In the final analysis, one also cannot rule out that Greece must, or would want to, leave the eurozone."

Nor is growing German irritation confined to Greece. It extends to the European Central Bank (ECB). There is substantial disapproval of its policy of buying eurozone government bonds in order to support debt-laden partners in the currency union, such as Greece, Italy and Spain. Hans-Werner Sinn, president of the Munich-based Ifo Institute, Germany's largest economic think tank, argues that the ECB had violated principles under which Germany had joined the euro. These reflected the lessons it had learnt from its experience of hyperinflation in the 1920s.

This reference to the German hyperinflation of 1923 is highly significant. For when money became practically worthless, as it did for a short period, the savings of many middle class families were destroyed. The memory of it is filed away in German minds under the heading "never again". It lies alongside Germany's easily revived feelings of resentment, of which a famous example is the Stab-in-the-Back legend invented to explain Germany's defeat in the First World War.

For up-to-date evidence that this sentiment has found a new cause, read Bild, Germany's mass-circulation newspaper. A recent article compared Germany with Greece, noting: "Here, people work until they are 67 and there is no 14th month salary for civil servants. Here, nobody needs to pay a €1,000 bribe to get a hospital bed in time... Our petrol stations have cash registers, taxi drivers give receipts and farmers don't swindle EU subsidies with millions of non-existent olive trees. Germany also has high debts but we can settle them. That's because we get up early and work all day." And the Greeks don't, was the unstated conclusion.

Thus the original understanding, reached at the beginning of the debt crisis, that Germany, along with its partner countries, would help Greece re-structure its economy so that it could grow again and repay its debts and thus preserve the eurozone, has frayed to breaking point. Greece cannot recover and Germany's patience is running out. The impossibility of avoiding a Greek default must be acknowledged shortly.

a.whittamsmith@independent.co.uk