In Germany, considering a eurozone minus Greece

Athens’s inability to get a grip on the debt problem is rattling markets and giving rise to talk of a notion that until recently has been considered taboo: a eurozone without Greece.

Greece's introduction last weekend of a new real estate tax and reduction in elected officials' pay are being called too little, too late to address its deep debt. And in Germany, which holds the purse strings when it comes to euro bailouts, rising unease about coming to the aid of ailing European economies is changing longstanding assumptions about Greece's future.

“If we want to stabilize the euro, we can’t afford having taboos any longer,” said German economy minister Philipp Rösler in a Sunday TV interview. “We should think about the possibility of an orderly sovereign default in Greece.”

Even though financial experts have insisted for some time that Greece is de facto insolvent, cabinet ministers and senior politicians in Berlin have refused until now to speculate about this possibility. The fear was that even a debate about a default might scare already nervous investors into taking even more money out of the markets, creating further problems for other eurozone member states and particularly for international banks.

Market reactions yesterday seemed to confirm this fear: The euro dropped to a 10-year low against the yen and a seven-month low against the dollar. Shares of French banks in particular – still holding considerable amounts of Greek debt and under threat of being downgraded by rating agency Moody’s – fell sharply.

In Germany, domestic politics is playing an important role in influencing attitudes about Greece. The debate here about a possible sovereign default led to an open split in the coalition government.

Mr. Rösler, who is also leader of the Free Democrats (FDP), the junior partner in Chancellor Angela Merkel’s coalition government, was the first to break ranks. Horst Seehofer, leader of the Christian Socialists and prime minister of Bavaria, followed suit, but went a step further by suggesting Greece's possible exclusion from the eurozone.

In an attempt to distance herself from these positions, Mrs. Merkel went on public radio Tuesday and urged her fellow politicians to chose their words carefully. "It is our top priority to prevent a Greek default which would cause a domino effect on other eurozone countries. But we can’t fix overnight what has been neglected for years,” she said, referring to the Greek economy.

Resistance grows

“You have a division between those believing that giving up on Greece will worsen the crisis for other eurozone members and those who think we can’t afford to pay for Greece any longer,” says Janis Emmanouilidis, senior policy analyst at the Brussels-based European Police Centre think tank. “Particularly many Free Democrats object to bailouts in general. And later this month the German parliament will vote on the planned expansion of the European rescue fund, the EFSF. What you see now is the formation of resistance against this expansion.”

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