The European Union was officially formed in 1992, with 12 starting member countries. Among those 12 were from the start Greece and Germany.
(source: telegraph.co.uk)
To become a member, the countries had to apply to some economic standards, such as never have a budget deficit less than 3 % of GDP per annum and debt to GDP ratio had to be lower than 60 %. All 12 members followed those rules and accepted eachother to the union. In 1992 the countries also agreed to start using the EURO instead of their domestic currencies as legal tender as of 2002. That way a monetary union was set.
(source: wikipedia.org)
This monetary union is not complete. The countries still have their own bonds. Which means the market decides what the interest rate on the bonds of the different countries are. This is very strange in a monetary union. Because each economy inside the union is different, with consequences for the interest-rates for the different countries.
In 2008 the whole world economy is going down the drain because a huge housing bubble and related derivatives on sub-prime loans in the USA. American banks fail, and a domino effect puts almost all the banks in the world in big trouble. Most banks get bailed out by their respective governments, in the USA, and in Europe.
This blows up the debt/GDP ratio from almost every country in the world.
Greece is one of the weakest victims as their economy was already in trouble, the housing bubble and bank bail-outs put their budget and debt/GDP ratio deep into the red.
(source: investmentweek.co.uk)
Greece is found the easy victim for the other members of the European Union. The finger pointing puts Greece in the headlines of the news, which comes in handy for the other EU-members to shift the attention of their slacking economies. In 2011 Greece gets a knife to the throat by the EU and the IMF to go to deep structural reforms and cuts in government spending.
The result is the markets don't trust Greece anymore, and Greece can't get any loans on the bond market anymore, unless they pay 40 % per year. The IMF and the EU want to lend them an emergency fund but the reforms have to be accepted. They even threaten to throw them out of the EU and the monetary union if they do not go through with the reforms. These reforms are actual economic suïcide at that moment, but they have no choice, Greece says yes.
Where comes Germany into play? Germany is historically in the EU, the country that has to pay the lowest interest rate on bonds, as they are the biggest economy and considered the strongest economy. From the moment that Greece said yes to the EU, the bond rate dropped to about 7 %, which is still incredibly high. Germany could at that moment loan money at around 2 %. So Germany lent hundreds of billions of cheap money, and bought bonds of other countries. A big share of that money was borrowed out to Greece. The spread between the interest Germany had to pay and the interest they cashed was so big, at some time more than 10 % per year, this was a money machine. Especially if you know Greece gets emergency loans from the IMF to repay their debts. Angela Merkel was at good end of a sure bet. With the EU she forced Greece to accept a cheap loan from the IMF which ensured Greece would stay in the Eurozone. Then, when Greece needed more money to get their economy going again Angela was their to the rescue with loans at rates of 10 to 12 % of which she was sure they were going to be repaid as she was at the table when the IMF gave the rescue package to Greece.
The consequences for Greece were and are immense. Pensions were cut, 30 % unemployment rate, small businesses went bankrupt, suïcide rates went through the roof... It was a Greek drama, and they are at this moment still recovering from this economic warfare. The bond rates have dropped now to around 5.5 %, but the spread with the German rates is still more than 4 %. So Germany still profits every day from this tragedy. And they do this to in other Southern European countries like Spain, Portugal and Italy, but on a smaller scale.
This could all have been solved by implementing an equal bond rate for all the members of the Eurozone. This would have still forced Greece to do reform, but at a much lower price, financially and humanly. But it would have made the German bond rate go up with a few percentile points, and that wasn't worth it for Angela Merkel...
Sincerely Pele23
