Chapter 6
Lamentations (Safe European Home?)
The French town of Deauville, with its hippodrome, grand hotels and beachfront promenade, is a resort that trades on its illustrious past. Developed in the 1860s during France’s Belle Epoque, the town found its true vocation after enlisting the help of Eugène Cornuché, who had just given his Paris restaurant Maxim’s an Art Nouveau makeover, ensuring the decor was as fashionable as the food. Cornuché set about redeveloping the town’s casino, opening it in 1912, the year after the race course was inaugurated, thus establishing Deauville as a playground for the Paris smart set. Coco Chanel was attracted to the town by her polo-playing lover, Captain Arthur Edward “Boy” Capel, and opened one of her first boutiques there in 1913. Isadora Duncan arrived in the summer of 1914 during World War I and stayed for several months, working as a nurse in the casino, which had been converted to a military hospital. In the 1920s, the seaside boardwalk was constructed and the town cemented its reputation as a spa resort famed for its extravagant parties. Even in the late 1940s after World War II had brought its golden years to a close, Rita Hayworth and her racehorse-owning third husband, Prince Aly Khan, were regular visitors; Yves Saint-Laurent took up residence in the town in 1976.1 Just along the Atlantic coast, traveling west toward Cherbourg through fertile farmland, the fields ringed by mature hedges, the spirit of the roaring ‘20s gives way to the wartime reality of two decades later. On June 6, 1944, better known as D-Day, more than 160,000 Allied soldiers fought their way ashore against unsuspecting German forces: the British Army landing at Sword Beach, Juno and Gold beaches, and the US Army at Omaha and Utah Beach. Normandy, for all its renown for horse racing and summer bathing, its Camembert cheese and calvados, is also a region fraught with 20th-century European history.
In the annals of the sovereign debt crisis and its existential threat to the euro, October 2010 in Deauville will go down for many as the scene of Merkel’s biggest error and the moment contagion took hold, widening Greece’s debt problems into a market rout. Ireland, bludgeoned by borrowing rates that soared to unsustainable levels after Deauville, was forced to call for a bailout five weeks later. Portugal fell victim in April the following year. Deauville was also where Germany and France began to impose their joint response on the rest of the euro region, stoking resentment. The euro, designed to make Europe more like one country, was splitting the continent into unequal northern and southern tiers, with France as something of a swing state. Merkel needed allies to back Germany’s fix and the “German–French axis,” linking the euro region’s two biggest economies, was the natural centerpiece. If the aim was to avoid the impression in some quarters of a German diktat on Europe, it didn’t work. In Greece, which suffered four years of German occupation during World War II, Merkel was vilified by protesters as a Nazi reincarnation. German President Joachim Gauck felt the need to address the matter in February 2013, using his first major foray into the political sphere to reassure Europe that Germany was not set on domination.2 While Germany’s image also declined elsewhere in Europe, polls show overall non-Germans’ respect for the perceived homeland of hard work, thriftiness, and prosperity was still high.3
Merkel’s breakthrough at Deauville was persuading Nicolas Sarkozy to go along with her plan to make investors pay for their role in bringing Greece to its knees and forcing governments to respond with tens of billions of euros in rescue packages. From the European Central Bank to the U.S., from Greece’s government to the highest officials at the European Union, all agree that this was a tipping point in the crisis. After Merkel and Sarkozy strolled along the boardwalk in harmony, Greece’s troubles ignited a fire that spread uncontrolled across the euro area and threatened to engulf the entire global economy. The occasion was a two-day meeting of Merkel, Sarkozy, and Russian President Dmitry Medvedev. Sarkozy was set to hold the rotating presidency of the G-8 and G-20 in 2011, and Deauville had been chosen as the location for G-8 leaders to meet in May of that year. The French–German–Russian meeting was meant to be an advance show of common purpose on issues such as the Middle East, Iran, and EU–Russian relations. Yet as so often during the debt crisis, the euro area’s problems steamrolled the business at hand.
Merkel and Sarkozy met on October 18 to take the air before having dinner at a Deauville restaurant with Medvedev. The two were pictured walking on the boardwalk behind the setting sun, deep in conversation. They returned to announce a three-point plan that took their European peers by surprise. Merkel won agreement from Sarkozy to push for changes to the EU’s guiding treaty to reinforce budget discipline, while he gained a concession that sanctions for countries breaching debt and deficit rules wouldn’t be automatic, as Merkel had proposed. Rather they would kick in progressively, becoming in diplomatic-speak “more automatic.” While the meaning of the agreement was obscured by European Union jargon, it yielded significant victories for each side. Sarkozy won by blunting the prospect of unelected outside bodies from imposing sanctions on national governments, an idea far more contentious in France than in Germany. Merkel gained by laying the groundwork for a Europe-wide treaty on budget discipline, her national goal since she took office in 2005 and one she was convinced was needed across Europe to tackle the root cause of the debt crisis. Aiming to pre-empt opposition to the prospect of cumbersome EU treaty revision, the two leaders stressed the limited nature of the changes. That failed to avert U.K. unease, with the Daily Telegraph foreseeing “the outbreak of political warfare” in David Cameron’s coalition of largely Euroskeptic Conservatives and more EU-friendly Liberal Democrats. Thirteen months later, Cameron aligned the U.K. with the Czech Republic as the only two of the EU’s 27 members that refused to sign up to Merkel’s deficit-reduction plan, known as the fiscal compact.
The most contentious aspect of the Deauville deal, forcing investors to share in the terms of future country bailouts to mitigate the burden for taxpayers, merited a single line in the joint statement. Merkel and Sarkozy outlined the need to establish a permanent way to help crisis-hit countries once the fund that had been set up that May ran its course, saying the new instrument should ensure “an adequate participation of private creditors.” At a subsequent press conference, Sarkozy was equally economical, saying they had charged EU President Herman Van Rompuy with studying “how the private sector can be involved” in the permanent crisis-resolution mechanism. It was left to Merkel to explain why. “We need treaty changes in particular to ensure that creditors are enlisted in helping make good in the event of a crisis, to help overcome the crisis,” she said. “It’s especially important that we construct this mechanism so that all those involved are held more responsible. That’s precisely the lesson that we need to take from this crisis.”
Sprung on markets in an off-hand way, the message on making investors pay was communicated poorly: the threat of sovereign-debt haircuts was meant to apply to a bailout system that was still being worked out and was only due to start operating about three years down the road. It was a miscalculation that backfired spectacularly. In the almost six months since Greece was awarded a 110 billion-euro bailout, followed by creation of the 750 billion-euro European Financial Stability Facility (EFSF), the spread in interest rates between Greece and Germany had tumbled by more than 300 basis points, or a full 3 percentage points. That trend reversed as Greek borrowing costs picked up again after Deauville, undoing the advances made in resolving the crisis. The announcement is blamed by Greece’s then-finance minister Papaconstantinou as one of the main reasons the Greek program lost its way: “It made what was until that point a possibly containable crisis in one country into a full-blown, systemic issue.” The U.S. judged that making private-sector involvement a precondition for future European programs would pull the floor out from under the little calm that had been achieved through the EFSF. In the words of a senior U.S. official, Deauville was a complete disaster that led the Europeans into another death spiral – and the U.S. told them as much.
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While Merkel and Sarkozy met regularly to coordinate their stance before international meetings and issued joint statements, this time was different. It was one week before an EU summit and the same day as European finance ministers were meeting to hammer out the details of the proposed permanent rescue mechanism. Merkel and Sarkozy not only reached an agreement without informing the other governments, they also pre-empted the outcome of negotiations that were about to take place. With the weight of Europe’s two biggest economies behind one set of proposals, it was next to impossible for the other 25 states to resist, let alone for the 14 euro nations. ECB chief Trichet railed against the plan at a private meeting of finance ministers from euro countries. He took the highly unusual step of going public to express his reservations, saying that requiring investors to take losses in a sovereign rescue would undermine market confidence. Spain’s then Prime Minister José Luis Rodríguez Zapatero, who was feeling the heat of rising borrowing costs, said he opposed it. Luxembourg’s Prime Minister Jean-Claude Juncker, who chaired the group of euro finance ministers, said that pressing on with Merkel’s proposals “could potentially drive investors from the eurozone, especially from the peripheral countries.”
In November, almost four weeks after Deauville, an impromptu statement attempting to clarify what the plan entailed was handed out to reporters during a G-20 summit in the South Korean capital Seoul. Drawn up on behalf of European finance ministers, it was the result of negotiations between Germany’s Deputy Finance Minister Jörg Asmussen, French government officials, and Trichet. It stressed that any losses on creditors would only apply after 2013 and that standard IMF practice for debt restructuring would apply. According to the U.S. official, it was the Obama administration that told the Europeans they had to issue a statement to try and take back what had been said at Deauville. The U.S. view was that Merkel and Sarkozy were building an obvious flaw into the design of the permanent mechanism that would strangle its effectiveness long before its birth. The trans-Atlantic finger-pointing intensified in the run-up to Seoul, so much so that Merkel and Obama addressed the issue head on during their bilateral meeting. They agreed in private that such unpleasantness did not get them anywhere and should not be repeated. The statement released was calming but the issue dragged on for months. The message had gotten out that investors in the euro area were to take a hit, and Merkel did little to lessen the concern which persisted until the idea of forcing losses was finally dropped a year later.
Merkel’s proposal had its genesis in her May declaration of war on the “perfidious” speculators she regarded as turning budgetary troubles into a systemic crisis. They were the target of Germany’s ban on naked short-selling introduced without warning overnight in June. Through her determination that creditors contribute to the cost of bailouts, Merkel broke a financial taboo – not by pushing for investors to take losses, but by announcing it in advance. The deal that took everyone by surprise had in fact been hatched in Brussels on the sidelines of a separate meeting several days before Deauville, according to Xavier Musca, Sarkozy’s chief economic adviser. Merkel and Sarkozy both attended a summit of European and Asian leaders in the Belgian capital on October 4–5. Merkel was being advised at the time by officials including Otmar Issing, a former ECB executive board member whom she appointed to head an advisory panel on “new financial order” in 2008. He argued that the debt crisis was an opportunity to realign market incentives to account for differences in economic strength between euro-area economies, which had been leveled by creating a central bank with a single set of interest rates for the bloc. After governments bailed out Greece, Merkel was being told that market signals needed to be restored to highlight to investors that Irish or Portuguese government debt was riskier than German bunds. By warning private bondholders they would be the first to take losses in future sovereign-debt crises, lending would more accurately reflect states’ creditworthiness and put pressure on profligate governments to change their ways. “It could have been an excellent idea at the start of monetary union precisely to tell the markets, don’t rush to buy Greek or Portuguese debt,” said Musca. “But if at the heart of the crisis you tell the market not only will these countries have difficulties, but in fact this risk will materialize and you will be the first to pay, the first reaction is to withdraw your investment from the eurozone, and you create precisely the problems you’re trying to cope with. So it’s a disaster.” Private-sector involvement, or PSI, went on to become the buzzword in the 2011 episode of the crisis.
Sarkozy was against PSI as he was convinced it would fan the flames of the crisis and cause it to spread. The German side didn’t see the contagion threat and was more concerned about applying pressure on countries to get a grip on their own finances before the markets forced them under and prompted an international rescue, borne in large part by German taxpayers. Merkel said that any further German solidarity for countries in trouble was dependent upon the private sector taking its share of the cost. It was the principle that mattered, and in any case, as far as the French were concerned, Merkel thought it surely possible for the permanent mechanism to be devised in such a way that it ensured private-sector involvement without causing excessive harm to the markets.
The result of the political horse trading was kept secret until Deauville. Sarkozy agreed to PSI since he regarded it as the lesser evil to open conflict between France and Germany on the means of tackling the crisis at hand – and necessary to secure agreement on setting up the future rescue fund, known as the European Stability Mechanism. France set about trying to water down the commitment to PSI, but the damage was done; markets already suffering a collapse in sentiment toward the eurozone saw only that the relation between creditors and states had changed for the worse. One senior German official admitted that Deauville, which had to be unwound, was not the most fortunate package to have been struck – even if elements of PSI could still be seen in the eventual debt relief granted to Greece 18 months later in what would be the biggest restructuring in history. PSI might be politically and financially justified, but the price that had to paid for the principle was high and for the Germans it was, and remains, a double-edged sword.
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By late November 2010 when she addressed the annual party convention of her Christian Democratic Union in Karlsruhe, home to Germany’s equivalent of the supreme court, Merkel had a symbolic scalp to flourish. Combining a drive for individual budget responsibility across the region with the need to clamp down on those speculators who had taken advantage of euro states’ moment of fiscal weakness, Merkel wasn’t just beginning to latch on to a justification for her approach to crisis fighting; she was formulating a stance that served as a pitch for de facto leadership of the new Europe.
It was market excesses that caused the crisis, and “markets have to bear the consequences of their actions,” Merkel told delegates. Dismissing British concerns, Merkel said that changes to EU treaties to stem the crisis, though regarded by some as a “utopian” idea, can and must be made. The collapse of the euro area would mean the end of Europe’s “uniting idea” that gave the continent peace and prosperity after World War II, she said. “If the euro fails, then Europe fails,” and Germany’s duty is to stop that from happening. Its task is no less than to “anchor a new stability culture in Europe.”
The fervor of fiscal righteousness burned brightly within her party too. Leo Dautzenberg, then the CDU’s finance policy spokesman, said the coalition had agreed on a set of proposals for the future bailout mechanism that included private investors “as a core element, involving if necessary taking a haircut,” an enforced loss on their original investment. And he knew well where to lay the blame – the Anglo-Saxons. “Wall Street investors have also got to shoulder their liabilities,” he said. “We can’t push everything on to taxpayers.”4
Merkel that year assumed the greatest share of the liability for Greece and for Europe’s bailout fund, lost Germany’s most populous state in an election that cost her control of the upper house, and survived a drop in public support for the CDU to the lowest in four years – yet she was re-elected party leader with 90.4 percent of the vote. Given Sarkozy’s support and the political backing of her party for her stance, Merkel wasn’t about to back down now. Opinion polls were meanwhile suggesting that voters were returning to her side as she dictated the terms of Europe’s anti-crisis fight.
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Deauville was also the birth of “Merkozy,” the duopoly that was to dominate European decision making for the next 19 months. But with Germany’s economy purring and France’s sputtering, it was an unequal partnership from the start. After credit rating agency Standard & Poor’s warned France that it was considering stripping the country of its AAA rating in December 2011 – a threat it carried out the following month – Merkel was very much in the driving seat. Sarkozy even said that France should be more like Germany during his unsuccessful 2012 campaign for re-election. Merkozy reached its apogee at the end of 2011, when German public broadcaster ARD reworked “Dinner for One,” a mainstay of its Christmas television programming, with Merkel and Sarkozy as the main characters attending a crisis summit rather than hosting a New Year’s celebration. As in the 1963 black and white original featuring the lady of the house and her increasingly inebriated butler, the skit ended with the two going upstairs to bed together, with Sarkozy saying he’ll “give it AAA.” Merkozy, along with credit ratings, eurobonds and yield spreads, had gone mainstream.
Sarkozy and Merkel were polar opposites who had learned to cooperate as they were thrown together during the crisis. He was President Bling Bling with a model wife and an impetuous urge to make policy on the hoof; she an East German scientist married to a physics professor who carefully weighed her responses and preferred to do her talking behind closed doors. Merkel and Sarkozy had divergent economic philosophies, though their financial interests both lay in holding the euro together and stopping Greece’s problems from spreading. While French banks’ exposure to Greece was the highest of any European country, with overall claims of $56.6 billion in 2010, German banks were the biggest foreign holders of Greek government bonds, with $22.7 billion.5 The German and French leaders toiled hard to overcome their divisions and forge a working relationship, taking their cue as the heads of Europe’s two biggest economies to lead the response to the challenges. Over time, as they were forced to confront the situation in Greece and its multiple ramifications, Merkel realized that for all his ostentation Sarkozy could be taken at his word. They had disagreements on crisis responses, they negotiated, struck a deal, and he would stick to the accord rather than seek to undermine it. Then they both had to go out and sell it to the European Commission, the European Central Bank, and the member states. Sarkozy would seek to persuade the southern European countries that the deal was workable, while Merkel convinced the northern states it was acceptable to them. “I think Merkel at the start considered Sarkozy a Mediterranean, not very positive toward Germany, very French,” said Xavier Musca. “She realized that he was reliable and he was doing the job and he was defending in public the positions they had agreed on in the bilateral meeting. So to a certain extent for her it was a good alliance and the atmosphere between them improved.” Not that either leader agreed crisis-prevention measures just to please the other – each had their respective domestic constraints. Yet “at some point you had the feeling of two leaders not trying to oppose other national interests but finding the best solution for Europe,” Musca said.
François Hollande unseated Sarkozy in May 2012 with a campaign based in large part on his rejection of Sarkozy’s closeness to Merkel and collusion with her crisis-fighting policies for Europe. It came too late to dispel the resentment that had been building at the German–French crisis axis, although his election did serve to focus the anger on Germany alone. Tomasz Bielecki, Brussels correspondent for the Polish daily Gazeta Wyborcza, caught the European dilemma posed by the German–French axis in an article published in October 2011 and translated by Presseurop. “When the Germans and the French are unable to reach consensus, lamentations can be heard about the lack of real leadership in Europe; when they near agreement, protests against diktat mount.”6
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If Deauville gave Merkel a boost, it might just have tipped Ireland over the edge. Within 10 days Irish 10-year bond yields breached the 7 percent level and by early November 2010, Ireland was being told by Germany and the ECB that it was in the interests of the wider euro area if the Irish government applied for aid to quell the market unrest. The pressure was ratcheted up on Irish Finance Minister Brian Lenihan at a meeting of his euro region counterparts on November 16. Jörg Asmussen, who was by now at the forefront of Germany’s crisis response, recalled it was made clear to Lenihan this was not just about Ireland but about the economic wellbeing of the rest of the euro region. Lenihan, who died of pancreatic cancer in June 2011, saw the bulk of the pressure for a bailout coming from the ECB, which had pumped money into the Irish banking system then on the verge of collapse. Germany’s Wolfgang Schäuble was adding his weight, pressing Lenihan to announce publicly that Ireland was requesting a bailout program at the meeting’s conclusion.7 He refused; however, five days later, on November 21, the Irish government made the request. In a letter the same day to Trichet at the ECB’s headquarters in Kaiserstrasse, Frankfurt, Lenihan cited concerns about Greece and a slowing economic recovery along with credit-rating decisions compounded by negative market sentiment for contributing to “a sharp reversal in financial conditions.” That led to a “crisis in confidence” in Ireland’s banks and the government’s ability to meet its funding obligations, he said. Lenihan highlighted a fourth factor in his letter, which was released by the ECB and the Irish Finance Ministry after Freedom of Information requests made by Irish news websites TheJournal.ie and TheStory.ie.8 “Uncertainty about the status of bondholders in the event of access to external support added to instability,” Lenihan wrote. Put more simply, Ireland’s government saw German-led moves to force investors holding Irish government bonds to pay for future bailouts as a kick in the teeth when the country’s financial system was already on its knees. If investors were thinking of pulling out of Ireland, Merkel had given them another reason to do so.
EU ministers met on November 28 and agreed on a rescue of 85 billion euros, and Ireland became the second country after Greece to lose control of its economic destiny by joining what is euphemistically called a “program.” Measures were imposed by the triumvirate of the EU, the IMF and the ECB in return for the aid. Tens of thousands protested on the streets across Ireland, with feelings running high against what was perceived as outside interference forcing the country to go begging to Germany. Lenihan told a BBC Radio 4 program six months later that European pressure risked triggering social unrest. “They could push people beyond the brink,” he said.
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A crane winched up a burned out newspaper kiosk from the charred stump of its base as the Athens cleansing department began to sweep up the debris of rioting for the second time that year. The streets streamed with water, discarded placards were scattered on the ground, and smoke hung in the gardens of Syntagma Square where birds had hopped from branch to branch that morning before the demonstration began. The city’s mayor demanded compensation from the central government for the cost of cleaning up central Athens. He had done the same four months earlier, without response.
Athens in October 2011 was a city under siege, with the focus of the protests the parliament building at the top of Syntagma Square. Protected by a ring of riot police holding back the demonstrators, inside besieged lawmakers deliberated late into the night over the latest round of wage cuts, reductions to pensions, job losses, and enforced privatization of state assets that were a condition of a sixth tranche of outside aid. Without it, wages would go unpaid, hospitals couldn’t order drugs, and the garbage already piled high in the streets threatening to become a health hazard might never be removed.
International monitors from the so-called troika of creditors that were supplying the funds – the IMF, the ECB, and the European Commission – had found the country’s adherence to its bailout program wanting, but nevertheless recommended paying the next installment of aid “as soon as possible” after the government had made good on its pledges. Even then, the country’s “debt dynamics” remained worrying. Successive rounds of enforced austerity were taking their toll on the population of Greece, then enduring a fourth straight year of recession. With the country on life support and no signs of economic recovery on the horizon, the regime of cuts without visible progress was pushing the population to breaking point. And they weren’t alone: across much of Western Europe, from Dublin to Rome, Lisbon to Madrid, people were taking to the streets over the imposition of policy measures that they saw as unjustly weighted toward austerity. Merkel, as the principle paymaster for bailout nations Greece, Ireland and Portugal and the chief proponent of reining in government spending across the EU, was becoming the target of their fury.
It was a sign of Germany’s increasing dominance during the crisis. Volker Kauder, the parliamentary head of Merkel’s Christian Democratic bloc, captured the mood with an ill-advised remark during a speech to a party convention in Leipzig in November 2011. Trumpeting Merkel’s success in persuading leaders to curb deficits, he noted that European leaders who had at first refused to consider Merkel’s deficit-reduction proposals were emulating the German model of a “debt brake” written into the constitution. “Now, all of a sudden, Europe is speaking German,” Kauder said. “Not as a language, but in its acceptance of the instruments for which Angela Merkel has fought so hard, and with success in the end.”
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The mood was dark in Athens that fall, as police in full riot gear responded to volleys of petrol bombs and rocks with baton charges and stun grenades. Some protestors had come prepared for violence, wearing motorcycle helmets and face masks. They lit small fires in overflowing garbage bins around the square in the belief that the smoke acted as an antidote to tear gas. A man suffered a heart attack and died after he was struck on the head by a rock near the Grande Bretagne hotel on a corner of the square where the worst of the clashes took place. It was at the Grande Bretagne, the most opulent hotel in town, that the first International Olympic Committee convened in 1896 under Baron Pierre de Coubertin. The Nazis made their headquarters there in 1941 at the start of the wartime occupation; Hitler and Field Marshall Rommel were both guests. At the war’s end, the British moved in and Winston Churchill held talks there with George Papandreou, a member of the government in exile who would go on to serve as prime minister three times and found the political dynasty. Archbishop Makarios, the Greek Cypriot president dubbed the “Castro of the Mediterranean,” addressed crowds from a second floor balcony of the hotel after the Turkish invasion of Cyprus.9
The Grande Bretagne’s history mirrors that of modern Greece and it too bore the scars of the anti-austerity riots: its marble steps looked like they had been gnawed by a giant rat after demonstrators chipped away at the stone to hurl at the police. Greta Garbo, Elizabeth Taylor, Brigitte Bardot and Maria Callas all lodged in the hotel’s royal suite in earlier times. What few guests remained the day after the anti-austerity demonstrations were greeted by the hotel’s ancient dog and the bitter reek of tear gas.
The economic hardship and failure to achieve bailout targets was meanwhile undermining what little political stability remained. The current George Papandreou, who had followed his father and grandfather to serve as Greece’s prime minister, saw his majority whittled down to single digits as members of his coalition balked at plans to reform the labor laws and force through 30,000 job losses in the state sector. Polls showed public support collapsing for the mainstream parties, Papandreou’s PASOK and New Democracy, and a rise in backing for parties such as the left-wing umbrella movement Syriza. The teachers, kindergarten nannies, nurses and dockworkers who focused their rage on Greece’s political leaders were beginning to see their own politicians as agents of outside powers, chief among them Germany. Where Merkel regarded austerity as a means of tackling the deficit and as justification for German solidarity, some in Greece saw a bid to enforce free market shock therapy on their country to crush the state dependence of past decades. For a country that suffered starvation and depredation under Nazi occupation, it wasn’t much of a leap for some in the media and politics to project austerity through the prism of wartime atrocity; Germans seeking to finish by peaceful means what they had failed to achieve in World War II.
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A Time magazine article from February 1942 described Greece as the hungriest country in the world, blaming the Nazi army of occupation’s systematic stripping of the country’s food supplies to send to troops in Africa. Between 1,700 and 2,000 people were dying each day as starvation coupled with cholera, typhus, typhoid, and dysentery ravaged the populations of Athens and the port of Piraeus.10 Oxfam, the international anti-poverty non-governmental organization, was founded in Britain in 1942 specifically to aid Greece. Originally the Oxford Committee for Famine Relief, it campaigned for food supplies to be sent through an Allied naval blockade to the starving women and children of occupied Greece.11
Up a narrow side street just off the southern corner of Syntagma Square, the Jewish Museum of Greece details in gaunt terms the impact of the Nazi occupation. The Jews of Greece, known as the Romaniote, date back to antiquity, with Jewish settlement beginning in the 3rd century B.C. In the year 48 A.D., the Apostle Paul found a thriving Jewish community, and preached in synagogues in Corinth, Salonika, and Veroia. The Hebrew word “Tik” for the container used to hold the Sepher Torah, the Jewish sacred book of the law of Moses, comes from the Greek “Thiki,” meaning case. The Jewish community flourished through the Roman and Byzantine empires, so much so that Greece became a refuge for persecuted Jews elsewhere in Western and Central Europe from the 14th century. They were engaged in textiles and glassware, printing, law, medicine, and shipping insurance. The first Greek constitution from 1844 granted all Greek citizens, including Jews, equal rights. At the beginning of the 20th century there were 10,000 Jews in Greece. That number rose to 100,000 after the expansion of Greek territory following the Balkan wars of 1912–1913, two-thirds of that total in Salonika. By the end of World War II, 87 percent of the population had been murdered by Nazi Germany, one of the highest rates suffered by any Jewish community in Europe. At the war’s start, Jews fought with the Greek army against Italian forces after Mussolini ordered the invasion of Greece in October 1940. The Greeks counterattacked and drove the Italians back, pinning them down in Albania and inflicting the first land victory of the war over Axis forces. The Germans came to Italy’s assistance, invading Greece on April 6, 1941, and occupying Salonika three days later. They took Athens on April 27. The mass deportations began in March 1943. Jewish properties and business were seized by the Germans, art treasuries confiscated, synagogues and cemeteries plundered and destroyed. When the war ended, only about 10,000 Jews were still alive in Greece.12
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Merkel is the postwar chancellor with the least connection to Germany’s wartime legacy, yet with Greece’s unemployment soaring and the economy in ruins, there was a ready scapegoat to blame for the turmoil caused by the euro crisis. German flags were burned in the street, the embassy picketed, and a mock-up of Merkel wearing an SS uniform printed in Greek media and shown on television. Amid unrelenting pressure for more cuts to fulfill internationally imposed targets that were nowhere near to being met, George Karatzaferis, head of the LAOS party, said that Greece “could do without the German boot.”13 In Thessaloniki, Greece’s second city, a German government official attending a conference of Greek and German mayors was hustled by local municipal workers who chanted “Nazis Out” and played Greek radio recordings from the war over loudspeakers.14
For President Karolos Papoulias, an octogenarian former pole-vaulting champion who fought in the wartime resistance against the Nazis, Finance Minister Wolfgang Schäuble’s suggestion in early 2012 that Greek elections might have to be postponed was a step too far. Papoulias said he wouldn’t “accept insults to my country” from Schäuble nor from any of the other countries that were united in pressing for more austerity, highlighting the north-south divide emerging across Europe. “Who is Mr. Schäuble to ridicule Greece? Who are the Dutch? Who are the Finns?” Papoulias said. “We always had the pride to defend not just our own freedom, not just our own country, but the freedom of all of Europe.”15
In Germany, politicians and media showed no more restraint. The biggest-selling Bild newspaper regularly scorned the Greeks, running a front-page splash in early 2010 proclaiming: “So the Greeks DO want our money!” It later called for Greece to be forcibly ejected from the euro. Members of Merkel’s junior coalition partner, the Free Democrats, demanded that the Greek government sell some of its islands to make up for the shortfall in its budget. Focus magazine ran a cover issue in February of 2010 featuring a statue of Aphrodite, the Greek goddess of love, with her middle finger outstretched showing what in German is called the “Stinkefinger,” beside the title: “Fraudster in the Euro Family.” Merkel was thrown into the web of historic animosity that bubbles beneath the surface of contemporary Europe without a lifebelt. Whereas her political mentor Helmut Kohl turned his wartime experiences into a catalyst for European unity and her immediate predecessor Gerhard Schröder’s father was killed in action in Romania, Merkel was born in 1954, almost a decade after the war ended. Kohl thought that he could vanquish such European rifts forever with the introduction of the euro, the glue that would bind Europe together. Now, with fellow Europeans chafing at austerity they see as imposed by an overarching, overly dominant Germany, his efforts were being turned on their head.
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For all the historic antipathy, the Greek–German relationship is a complex one. German tourists started arriving en masse in Greece barely 20 years after the war’s end, and were welcomed with open arms. Greece’s first purpose-built tourist hotel complex opened in 1968 in Agios Nikolaos on Crete. By 2011, over 2 million Germans were visiting Greece each year, more than from any other nation. The love affair was to some degree mutual, even if for Greeks it was about work and for Germans about play. Greeks traveled to Germany to earn a better living as early as the 1950s, retracing immigration routes that began in the 18th century. Germany’s postwar economic miracle generated a demand for foreign labor that attracted Greeks as well as Turks and Italians to the urban centers of Frankfurt, Stuttgart and Munich, reaching its peak in the early 1970s. Among those to head north was Karolos Papoulias, the future president, who fled to Germany after Greece’s military dictatorship seized power in 1967. He was granted asylum, learned the language and studied at the University of Cologne, where he gained a doctorate in law. It was awarded under the name Karl.
Migration patterns are shifting as the crisis in the euro area has taken hold. Government statistics for the first half of 2012 showed that 501,000 people came to settle in Germany, an increase of 15 percent on 2011, which itself was up some 20 percent on 2010. The sharpest rise was recorded in those coming from Greece – an increase of 78 percent – followed by increases of 53 percent each in those arriving from Spain and Portugal, fellow southern countries whose labor markets and economies have suffered during the crisis.16 Not only is Merkel now predominant in European policy making, but Germany is the beacon of hope for many in those countries worst affected by the crisis.
In private, Merkel says she’s resigned to the role assigned to Germany during the debt crisis. She compares Germany’s relationship with other euro countries to that of the U.S. and the rest of the world: the nation at the top can’t expect to be loved, and neither can its leader. That’s something Merkel says she’s prepared to live with while she goes about tackling the causes of the crisis to re-equip Europe for the future.
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George Soros, the billionaire Hungarian investor and philanthropist, sees inward migration to Germany as an inevitable consequence of its policy: an insistence on budget cuts in the countries worst affected by the crisis serves only to deepen the recession there, leading, if unchecked, to depression. Merkel has it in her hands to resolve the crisis, but faces a choice, he says: She must decide whether to deploy Germany’s economic might to commit to a “genuine” form of debt sharing across the euro region, or risk the collapse of the euro, fatally undermining the European Union that was forged from the ashes of the war to ensure the circumstances could never arise for another conflict. As it is, “the member countries are divided into two classes – creditors and debtors – with the creditors in charge,” he said in a September 2012 speech in Berlin. “As the strongest creditor country, Germany is emerging as the hegemon.”17
Soros was a boy of 13 in March 1944 when the Nazis marched into his hometown, Budapest, at the start of the occupation of Hungary. He was ordered to work as a courier for the Jewish Council until his father realized the notices George was to deliver were intended for Jewish lawyers as a means of registering them for deportation to death camps. His father told him to warn them instead. Soros assumed a false identity procured by his father, and spent the rest of the war pretending to be a young Romanian Christian named Sandor Kiss, the godson of a Ministry of Agriculture employee whom his father paid. After the Soviet army took Budapest from the Nazis in early 1945, the Soros family was able to return to their apartment. A bomb had destroyed the kitchen, so they cooked and ate in the living room.18
Soros argues that Germany’s policy during the crisis is not due to malice, but rather a result of the Bundesbank, the central bank, being committed to “an outmoded monetary doctrine” rooted in Germany’s traumatic experiences with inflation after World War I. That means Germany tailors policy to clamp down on inflation, even in times of recession when prices are depressed, rather than addressing the crisis on its doorstep. With the periphery in trouble, investors migrate to the perceived safety of Germany, buying up government bonds and allowing Merkel’s government to enjoy record low borrowing costs. The relative economic health along the Rhine, Main, Danube and Spree is augmented while the misery elsewhere is compounded, widening the gulf and stoking antagonism.
“As time passes, there will be increasing grounds for blaming Germany for the policies it is imposing on Europe, while the German public will feel unjustly blamed,” Soros said in his Berlin speech. “This is truly a tragedy of historic significance. As in ancient Greek tragedies, misconceptions and the sheer lack of understanding have unintended but fateful consequences. In the long run a eurozone permanently divided between debtors and creditors is politically unacceptable. The debtors are bound to revolt sooner or later.”
Notes
1. Deauville official town website: http://www.deauville.org/fr/page.php?id=93.
2. Tony Czuczka, “Germany is not bent on dominating Europe, President Gauck Says,” Bloomberg News, February 22, 2013: http://www.bloomberg.com/news/2013-02-22/germany-is-not-bent-on-dominating-europe-president-gauck-says.html.
3. Pew Research Global Attitudes Project http://www.pewglobal.org/2012/05/29/chapter-4-views-of-eu-countries-and-leaders.
4. Tony Czuczka and Brian Parkin, “Merkel Tells Her Party Europe Can’t Afford to Let the Euro Fail Over Debt,” Bloomberg News, November 15: 2010: http://www.bloomberg.com/news/2010-11-15/merkel-defends-debt-crisis-mechanism-prepares-cdu-for-trials-to-come-.html.
5. Boris Groendahl, “German Banks Top French With $23 Billion in Greek Debt, BIS Report Shows,” Bloomberg News, June 6, 2011: http://www.bloomberg.com/news/2011-06-05/german-banks-top-french-with-23-billion-in-greek-debt-bis-says.html.
6. http://www.presseurop.eu/en/content/article/1065421-how-euro-will-divide-europe.
7. BBC Radio 4 programme from April 2011. Note copyright permission refused, so paraphrased: http://www.bbc.co.uk/news/uk-northern-ireland-13181082.
8. Lenihan letter widely published after made available through Freedom of Information: http://www.thejournal.ie/brian-lenihan-letter-trichet-bailout-648040-Oct2012/.
9. Grande Bretagne website: http://www.grandebretagne.gr/history/.
10. “Greece: Hungriest Country,” Time, February 9, 1942: http://www.time.com/time/magazine/article/0,9171,777595,00.html.
11. Oxfam website: http://www.oxfam.org/en/about/history.
12. Jewish Museum of Greece: http://www.jewishmuseum.gr/en/index.html.
13. Maria Petrakis and Simon Kennedy, “Papademos to Ministers: Back Bailout or Quit,” Bloomberg News, February 10, 2012: http://www.bloomberg.com/news/2012-02-10/greek-bailout-at-risk-as-party-pushes-back-against-german-demand-for-cuts.html.
14. AP report cited in: http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_15/11/2012_470144.
15. Eleni Chrepa, “Greek President Papoulias Slams German ‘Insults’ as Aid Discussions Stall,” Bloomberg News, February 15, 2012: http://www.bloomberg.com/news/2012-02-15/greek-president-to-forfeit-his-salary-in-solidarity-move-1-.html.
16. German federal statistics office release, November 15, 2012: https://www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2012/11/PD12_397_12711.html.
17. “The Tragedy of the European Union,” Speech on Soros website, September 10, 2012: http://www.georgesoros.com/interviews-speeches/entry/the_tragedy_of_the_european_union/.
18. George Soros homepage: http://www.georgesoros.com/faqs/entry/howgeorgesorossurvivednazis/.