Stournaras touched on a particularly sensitive issue when he said the money would not be linked to austerity conditions. According to the finance minister, Athens is already committed to applying economic reforms in exchange for its two bailouts, so no additional measures will be necessary. However, other members of the eurozone, especially governments in northern Europe, will not see things the same way. Bailouts are generally controversial in countries such as Germany, Austria, the Netherlands and Finland — none of which want their taxpayers' money to be squandered in southern countries.
Bailouts are also controversial in Greece, which is going through its deepest economic crisis in modern history. Prime Minister Antonis Samaras is leading a fragile coalition of Greece's two mainstream parties, his center-right New Democracy and the center-left Panhellenic Socialist Movement. This unstable alliance is the result of the two general elections that took place in 2012, when Greece's mainstream parties were seriously challenged by the Coalition of the Radical Left, an anti-establishment party that rejects austerity measures.
To some degree, Greece's traditional parties are fighting for their survival; the economic crisis has undermined popular support for the traditional elite. In June, the coalition's third member, the Democratic Left, abandoned the alliance in the wake of the backlash against the temporary closure of the country's national TV broadcaster. Since then, Samaras' coalition has enjoyed only a slim majority in the parliament. Additional measures imposed by Athens' external lenders would further anger the population and weaken an already fragile government.
Greece and the German Elections
Financial assistance to the eurozone periphery is a particularly sensitive issue in Germany, the European Union's largest economy and the main contributor to bailouts. German Chancellor Angela Merkel will seek re-election in Germany's general elections, which are scheduled for Sept. 22. Her popularity is mostly based on the strength of the German economy and the country's low unemployment rates, but her position on afflicted eurozone countries is also important. Most voters see Merkel as a protector of their money, and Germans generally support Berlin's demands for economic reforms in exchange for bailouts.
Since the beginning of the European crisis, Merkel has managed to strike a balance between providing aid to struggling countries (to ensure the eurozone's survival) and convincing German voters that their sacrifices are not in vain. But events in Greece have led Germany's main opposition party, the Social Democratic Party, to accuse Merkel of hiding the real costs of assisting countries in distress. Most mainstream parties in Germany understand that bailouts are necessary to keep the eurozone alive, but opposition parties are trying to use Greece's perennial problems to accuse Merkel of mismanaging the crisis and of misleading the German public.
This has forced German officials to send mixed signals to voters, foreign governments and international markets. On one hand, Berlin has signaled that it would support additional assistance for countries in distress to prevent the crisis from escalating. On the other, it has stressed that eurozone members should stop "living on borrowed money," ensuring that German funds would not be misspent. Merkel and German Finance Minister Wolfgang Schaeuble admitted that Greece will likely need more aid, but both have pointed out repeatedly that Germany will not agree to another write-off on Greek sovereign debt.
Intensifying Negotiations
Even though many eurozone countries question the application of bailouts, few question their necessity. Even if opposition parties assume control in Berlin, there will not be substantial policy changes regarding Mediterranean Europe. There is a general understanding among the political elite that European integration is vital for Germany's prosperity. Therefore, Greece is likely to receive additional aid in 2014 — should Athens formally request it — regardless of who is in power.
In 2012 when the second Greek bailout package was agreed upon, the International Monetary Fund warned that creditor countries would have to consider more measures to help in Greece in 2014, when the rescue program ended. But the negotiation over the aid will be difficult. The German parliament will argue over whether its taxpayers will see the seemingly endless aid ever be returned and whether the conditions put forward in return for aid are sensible. In addition, whoever is in charge in Berlin will face the challenge of convincing other northern countries to agree to more aid to Greece. This will be an increasingly difficult task, given the slowdown of northern economies and the decline in public support that additional aid is like to provoke.
A third bailout for Greece is not really at issue. What is at issue is whether Greece will be allowed to further write down its sovereign debt. Greece restructured its debt in 2012 — it applied a haircut of 53 percent — but because its economy was contracting, the haircut was not enough to relieve its extremely high debt to gross domestic product ratio, which is the European Union's highest at 160 percent.
On several occasions, the International Monetary Fund supported the idea of an additional write-down of Greek debt, but Germany repeatedly has rejected this idea. According to Merkel, a Greek debt write-down could spark a "domino effect of uncertainty" and scare off investors in the eurozone. While the last Greek haircut affected private investors, a new haircut would likely involve public institutions such as the central banks that now hold most of Greece's public debt.
Berlin argues that a haircut for official debt holders could lead to legal issues. A debt haircut affecting official institutions could be considered a direct fiscal transfer to a EU member state, which is not permitted under the bloc's treaties and thus could face legal challenges. So Berlin will likely negotiate for lower interest rate payments or more time for debt repayment instead of an actual debt write-down.
As a result, the debate over a third aid package and a new debt haircut for Greece will intensify after the elections in Germany, but it will become particularly strong in early 2014. In April 2014, the European Union is scheduled to issue a report on Greece's financial situation to determine whether Athens has reached a primary budget surplus. A positive assessment will make it easier for eurozone members to accept more aid for Greece. While additional aid is very likely, restructuring Greek debt will be difficult to negotiate.
