Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.
Greece's international creditors - the International Monetary Fund, the European Union and the European Central Bank (the troika) - already have unprecedented powers over Greek spending after negotiating with Athens stringent austerity measures and economic reforms in return for the first bailout.
Under the new German proposal, a budget commissioner would have veto powers over Greek budgetary measures if they were not in line with targets set by international lenders.Greece would also legally commit itself to servicing its debt, before spending any money in any other way.
"Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the Financial Times quotes the German plan as saying.
The Greeks know how much is at stake: "We must do everything that will restrict the recession and will begin the cycle of growth. The coming days will determine the coming decade," Finance Minister Evangelis Venizelos told reporters as the talks broke up on Saturday.
The idea was quickly rejected by the European Union's executive body and the government in Athens, with the EU Commission in Brussels insisting that "executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions."
A government official in Athens said a similar proposal had been floated last year but got nowhere. In an angry reaction from the Greek government, the education minister, Anna Diamantopoulou, a former EU commissioner, slammed the idea as "the product of a sick imagination" in an interview with local television.
Despite the immediate rejection by the Greek, and the EU's executive body, Germans officials have brought up their proposal for discussion among the 17-nation currency bloc's finance ministers because Greece has repeatedly failed to fulfill its commitments under its current €110bn lifeline.
Greece’s finance minister angrily rejected a German plan for the eurozone to impose a budget overseer onto Athens in return for a new €130bn bail-out, saying it would improperly force his country to choose between “financial assistance” and “national dignity”.
Centralized control is a key point of the new 'unified' Europe that Merkel is calling for. There is no room for national dignity in that supra-national project, or at least not when it costs €130bn.
A powerful budget commissioner would further diminish the political leeway of Greece's government, just as politicians there are gearing up for an election set to take place this spring. Greece is currently locked in a twin effort, seeking to secure a crucial debt relief deal with private investors while also tackling the pressing demands from its European partners and the IMF for more austerity measures and deeper reforms.
The debt relief deal may actually go through, contrary to my expectations - I didn't think it was likely that bondholders would agree to take a the proposed 75% haircut on their investments. According to officials involved in the discussions, negotiators representing Greek bondholders largely completed a deal with Athens last weekend which would cut the long-term value of privately held bonds by just over 70 per cent. This is a sign of how desperate the situation is in EU.
To avoid default, however, Greece needs to succeed on both fronts: giving it's bondholders a 'voluntary' fleecing, and getting more loans from EU. Failure on either front would force the country to default, pouring new fuel on the fires of Europe's debt crisis.
Concurring with German proposals, IMF has also signaled that Greece will have to give up autonomy over its budget if it is to receive the full backing of the international community for its second €130bn bail-out.
Christine Lagarde, the director general of the IMF, said that a new "fiscal compact" was set to be signed by European Union members at the vital leaders' summit on Monday that would 'centralize' budgetary powers.
Greek officials, are not the only ones who have reacted angrily to the IMF and German proposal for an EU budget commissioner with veto powers over Greek taxes and spending. In Athens on Friday, protesters tried to blockade inspectors from the "troika" of institutional lenders - the EU, the International Monetary Fund (IMF) and the European Central Bank (ECB) - into their hotel. The pains of failure to salvage this situation economically are likely to pale in comparison to politcal turmoil, which will result if the German plan succeeds.
"For your own good, surrender your sovereignty to us temporarily," is the essence of message to Greece coming from Germany. This a bad proposition for both parties, and the kind of proposal that supports the idea that Germany is establishing a Fourth Reich, perhaps unwittingly and with good intentions. It is a route to Germany hegemony on the continent by soft methods - conquering others through productivity, rather than brute force. This proposal supports my description of Angela Merkel as the "Mutti of the Fourth Reich".
Will the loss of Greek sovereignty be temporary? Does Germany benefit from the closer fiscal union proposed by Angela Merkel that leaves it shackled to an financial corpse (or a few)? What do you a call a plan which makes losers out of both parties? I call it a Suicide Pact.
As I pointed out, it's possible for Europe to back out of the euro - the greatest obstacle appears to be inability of leaders to admit that euro was mistake. Yet, even George Soros acknowledge at Davos last week: "The austerity Germany wants to impose will push Europe into an inflationary debt spiral. The architects of the euro knew it was an incomplete currency when they designed it." Soros didn't mention why such a flaw plan was pursued - you can read my opinion here.
It's hard to predict how this difficult situation will play out. I am certain of one thing - Benjamin Franklin was right when he said: "Those who would by up Essential Liberty to purchase a little Temporal Safety, deserve neither Liberty nor Safety".