Greece bailout battle: Germany cannot afford to grant Greece what it wishes

The world of international financial diplomacy is unusually rich in euphemism. So Greece’s request for a six-month “extension” of its European loan should be understood for what it is; a further bailout. It is not, as might be assumed, an acceptance of the plan put forward by Greece’s EU partners for a renewal of the current bailout package. Germany, the eurozone’s unhappy lender of last resort, has made it perfectly apparent that it will not budge. It should not.

The greatest objection to accepting the Greek pleas for a partial abandonment of the bailout package is nothing to do with Greece, but the precedent it would set. For it would say to the voters of other heavily indebted nations – Portugal and Spain principally – that all they have to do to skip free of their debts is to vote for some maverick group on the right or left. To invoke another euphemism, economists term this phenomenon “moral hazard” – perverse incentives to bad behaviour. That is no way to run a single currency.

Greece is not an impoverished kleptocracy. The funds the Greeks borrowed weren’t embezzled by a corrupt dictator. There has been much genuine suffering in recent years, but in the boom the Greeks happily imported German cars, French wines, Italian luxury goods and much else from their neighbours. For the best part of a decade they enjoyed German-style low interest rates.

Why should Greeks now be relieved of the obligation to pay? Why not extend the principle of debt forgiveness to the Spanish and others? In which case Germany really will have to adopt all her neighbours’ debts. Even if the Europhile Germans fancied such a project – which they do not – they could not afford to do so in any case. That is why they keep saying nein; they have to.