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european debt crisis

Demonstrator holds an anti-Merkel banner prior to a protest in front of the Greek Parliament in Athens on Tuesday Oct. 9, 2012. German Chancellor Angela Merkel makes her first visit to Greece since the euro zone crisis began three years ago.Lefteris Pitarakis/The Associated Press

Angela Merkel's first visit to Athens since the Greek-inspired debt crisis began almost three years ago was a brave, if impossible, mission.

Brave because the German Chancellor faced a hostile reaction Tuesday from the protesters who consider her the cruel face of austerity; impossible because her mission to please both German voters and the Greek people could accomplish neither.

Ms. Merkel made an in-and-out visit to Athens at the invitation of Greek Prime Minister Antonis Samaras, the leader of a fragile coalition government hemmed in by anti-austerity parties. Her six-hour trip was billed as a "gesture" to Greece's government and its people, and a "show of solidarity" for a country enduring Europe's deepest recession and second-highest jobless rate, after Spain.

The mood of the thousands of protesters who filled Syntagma Square in front of the parliament building was reportedly surly. In the biggest security operation since former U.S. president Bill Clinton's visit to Athens in 1999, about 7,000 police were called out to control the crowds and defend no-go areas. While the protests were largely peaceful, there were some clashes. Police tossed tear gas canisters at rock-throwing protesters.

The Athens protesters who carried signs demanding "Frau Merkel Get Out" and "No to the Fourth Reich" highlight the growing anger among Greeks over what they see as German-mandated austerity gone mad. They blame the harsh measures, demanded in exchange for bailout loans, for pushing the economy deep into recession, to the point that youth unemployment has reached 55 per cent.

Ms. Merkel came with no new money and no favours. She urged Greece to stick to its austerity and economic reform commitments. "I hope and I wish Greece remains part of the euro," she said. "We really can see light at the end of the tunnel."

That "light" is invisible to most Greeks. That's because the economy has entered its fifth year of recession. Since 2008, when Lehman Brothers vanished, the Greek economy has shrunk by 20 per cent. The government expects the economy to contract by 3.8 per cent in 2013, though many economists think the figure will be far worse. The only positive aspect of the Greek economy is that it is close to running a primary surplus, that is, the budget is more or less balanced if you strip out burgeoning interest payments.

In other words, Greece's bailouts are largely aimed at servicing its groaning pile of debt, which is forecast to reach 170 per cent of gross domestic product this year even though in a debt swap it eliminated €100-billion ($126-billion) of privately held sovereign debt in March. Next year's figure is forecast at an eye-watering 180 per cent. Greece's relative debt loads, the second-highest in the world after Japan, are unsustainable for a stable economy let alone one in collapse. Italy, a far richer and more-diversified economy, is struggling with a 120-per-cent debt-to-GDP ratio.

Greece's obvious inability to repay its debt is why Ms. Merkel's mission to Athens could please no one. As Greece's recession gets deeper and longer, its debt load gets ever higher, meaning a third bailout – the second came after the debt swap, the first in May, 2010 – is inevitable unless one of two things happens. The first would be Greece's exodus from the euro zone, which Ms. Merkel appeared to rule out on Tuesday. The second would be yet another massive debt "haircut," one involving both private and official holders of sovereign debt, including the European Central Bank, which ECB president Mario Draghi definitely ruled out last week.

The upshot is that German taxpayers, who already fear that Ms. Merkel has created a permanent "transfer union" to funnel Germany's riches to dying European economies, will be on the hook for the biggest single share of the next rescue mission. This third rescue will inevitably come with more demands for austerity, which in turn is bound to keep Greece in recession. German taxpayers and Greeks themselves will be united in misery.

Soon, German taxpayers and the Spanish people may be united in misery too. Austerity is damaging Spain's economy and the country's budget deficit refuses to come down. In the first half of this year, on a seasonally adjusted basis, the deficit as a percentage of first-half GDP was 9.4 per cent. That was up from the same period a year ago, in spite of the government spending cuts.

A Spanish sovereign bailout is almost certain to come, on top of the estimated €54-billion bailout for Spain's banks. German taxpayers will find themselves financing yet another rescue and Spanish citizens will complain about German demands for austerity. Madrid may be the destination for Ms. Merkel's next "solidarity" mission that pleases no one.