France and Germany 'to blame for Greece crisis'

As Greeks wait for a second eurozone rescue package to finally be agreed in Brussels today, many are blaming Germany and France for encouraging and benefiting from some of the much-criticised profligate spending which reduced Greece to near bankruptcy.

About 1,000 protesters gathered in front of the Greek Parliament in central Athens yesterday afternoon while riot police waited to see if there would be a fresh confrontation. But in general, Greeks are resigned to the new package of austerity measures that will cut jobs in public service and slash pensions and the minimum wage.

Hopes are high that the eurozone ministers meeting today will agree to the €130bn (£108bn) bailout after Athens detailed the new budget cuts.

The Greek Prime Minister, Lucas Papademos, headed to Brussels yesterday to take part in the negotiations.

While most Greeks are critical of the reforms on which the troika of the EU, International Monetary Fund and European Central Bank are insisting, many also feel that Germany and France shoulder a share of the blame for Greece's overspending.

Over much of the last decade, Greece – which has a population of 11 million people – has been one of the top five arms importers in the world. Most of the vastly expensive weapons, including submarines, tanks and combat aircraft, were made in Germany, France and the US.

The arms purchases were beyond Greece's capacity to absorb, even before the financial crisis struck in 2009. Several hundred Leopard battle tanks were bought from Germany, but there was no money to pay for ammunition for their guns. Even in 2010, when the extent of the financial disaster was apparent, Greece bought 223 howitzers and a submarine from Germany at a cost of €403m.

In the new bailout agreement, Greece will pledge to reduce its defence spending by some €400m. Eurozone leaders have hitherto been notably more tolerant of Greece's arms expenditure – though this is twice the size of the Nato average as a proportion of GDP – than it has of excessive spending on health or pensions.

"It is easily forgotten when Greece is criticised that there has been not very subtle pressure from France to buy six frigates," says Thanos Dokos, the director general of the Hellenic Foundation for European and Foreign Policy.

He adds that Greece was unwise to be the first purchaser of new weapons systems, such as German submarines, that still had technical glitches.

There is now a serious disparity between the limited resources of the Greek state and its very expensive weapons.

Simos Kedikoglou, an MP of the New Democracy party, says that "pilots of F-16 [combat aircraft] are paid €1,200-a-month salary while they fly aircraft worth €60-70 million."

Exercises are now being cancelled to save small sums of money.

Greece also has the world's largest merchant marine, but its navy is cutting back on its anti-piracy patrols to protect vessels in the Indian Ocean.

The justification for Greece's large army – 156,000 men compared to 250,000 in the German army – is the perceived threat from Turkey, which requires the Greeks to keep some form of military parity with a nation with seven times as many people.

Mr Dokos says that fear of being labelled unpatriotic has prevented the opposition in parliament from seeking a in defence expenditure. There has never been a debate in parliament about how far a Turkish threat really exists.

Many contracts signed at the height of Greece's spending spree cannot now be cancelled because of penalty clauses and such money that is left will be spent on maintenance.

Necessary action: What finance ministers must do

Release all the bailout funds Greece needs

European politicians are talking about approving the new €130bn Greek bailout piece by piece in order to keep pressure on Athens to keep delivering on reforms. The problem is that this approach will keep fears of a disorderly Greek default alive and thus undermine economic confidence across the Continent. Politicians should approve the bailout in its entirety.

Cut taxes and increase state spending in Germany

To return to economic health, uncompetitive states on the eurozone periphery must increase exports. But unless stronger eurozone states increase imports, these countries will find this rebalancing difficult, if not impossible. Germany, the economic giant of the single currency, runs a huge trade surplus. Berlin needs to bring down this surplus by boosting its imports.

Encourage quantitative easing

The eurozone as a whole is still sinking into recession. The single currency area contracted by 0.3 per cent in the final quarter of 2011. Investors are seizing safe assets rather than putting their money to work in the real economy. The European Central Bank could help by buying up large quantities of safe European sovereign bonds.

Forgive Ireland, Portugal and Italy's debts

Greek bondholders are set to take a "haircut" of around 70 per cent. European governments and the ECB are also helping to get Greece's national debt down. But Ireland, Portugal and Italy are also struggling under large debt piles in relation to their shrinking economies. European finance ministers ought to accept that, if debt forgiveness is good for Greece, it is good for other states too.

Introduce a system of eurobonds

The ECB has helped to assuage market concerns of another financial meltdown through a £500bn liquidity operation. But the interest rates that states such as Italy and Spain need to pay to borrow from the financial markets remain dangerously high. A pan-European guarantee of debt issued by European states – in return for pledges of reform in struggling states – ought to remove this concern entirely and bring down interest rates across the eurozone.

Ben Chu