Insight: Germany and Greece: a tale of estrangement

BERLIN (Reuters) - In early October of last year, German Economy Minister Philipp Roesler landed in Athens on a plane packed full of corporate executives, carrying a message of hope.

Germany and its leading firms, the young minister told Greek leaders, stood ready to help Greece overcome the debt crisis that had plunged its economy into recession and pushed it to the brink of its second EU/IMF rescue in little more than a year.

The mood in the meetings that followed was described by German officials who participated as "euphoric". Roesler received assurances that commercial disputes with German firms would be resolved. As soon as they were, Roesler promised, German investments would flow, focused on Greece's solar sector.

Yet within weeks the relationship had sunk to a postwar low. From interviews with German and European officials, Reuters has traced how and why trust broke down, with grave implications for Greece and Europe's single currency project.

"The minister was held up as a messiah who would save Greece," said a senior German official who travelled with Roesler and sat in on the meetings. By the time Roesler boarded his plane back to Berlin, he and his Greek counterpart Mihalis Chrysohoidis were using the familiar "du" and "esy".

Just weeks after Roesler's visit, Greece's then Prime Minister George Papandreou shocked his European partners by announcing plans - swiftly reversed - for a referendum on Greece's new 130 billion euro bailout package.

That gambit, a half dozen senior German officials told Reuters, marked the start of a dizzying deterioration in ties between Berlin and Athens, characterized by misunderstandings, broken promises and highly unusual public attacks.

A little more than half a year later, with Greece poised for an election that could determine whether it stays in the euro or returns to the drachma, the level of frustration in Berlin with the country's entrenched political class is sky high and its confidence that Athens can get back on track abysmally low.

German officials, many speaking on condition of anonymity due to the sensitivity of the issue before Sunday's vote, speak of a broken Greek bureaucracy incapable of implementing decisions taken at the top. A drive to root out corruption and tax-dodging has largely failed, they say.

Looking back, however, some German officials also acknowledge that Greece's descent into disarray, and the resulting risks for the broader euro zone, cannot be blamed on the Greeks alone.

It is also a story of neglect by Greece's European partners, they say, including Germany, which reluctantly bailed out Greece over two years ago, but then proceeded to ignore it until late 2011, when its dire economy, unstable politics and abysmal finances forced it back onto the agenda.

Roesler's trip came nearly a year-and-a-half after Germany bankrolled an initial rescue for Greece. Yet that still made him the first member of German Chancellor Angela Merkel's cabinet to visit the country since the rescue.

European Commission President Jose Manuel Barroso has not been to Greece in three years and European Council President Herman van Rompuy visited once in April 2011, a year after the rescue, their aides confirmed.

"For a year after the first bailout, neither Berlin nor Brussels made any symbolic political gestures towards Greece. No one travelled there to take stock of the situation for themselves," said Markus Kerber, chief executive of the BDI industry federation and a former finance ministry official.

"There was a fundamental misunderstanding that this would end up with big countries like Spain and Italy in the sights of the markets. They didn't realize that a single currency zone doesn't work on auto-pilot."

Merkel's spokesman Steffen Seibert vigorously denied Germany had ignored Greece, saying Berlin had closely followed the work of the so-called "troika" - the European Commission, European Central Bank and International Monetary Fund - which was charged with monitoring the country's progress. He noted that Papandreou himself had praised Germany for its support and cooperation in meetings with Merkel in March 2010 and September 2011.

"DON'T WORRY"

Two months after Roesler's trip, Chrysohoidis came to Berlin to discuss progress on the joint plans the two had unveiled in Athens. In a 20-minute conversation between the two ministers on December 13th, Roesler expressed frustration with the lack of movement on the Greek side. None of the outstanding disputes with German firms, among them Siemens, Bayer and Deutsche Telekom, had been settled and promised regulatory changes that were seen as a precondition for new investments were stalled.

"Don't worry, I'll take care of every single case personally," Chrysohoidis assured Roesler, according to one German official familiar with the talks.

Ties between Germany and Greece run deep. More than 300,000 Greeks reside in Germany, and nearly one in ten Greeks has worked, studied or lived here. In past years more German tourists visited Greece than from any other country.

But these links mask diametrically opposed cultures, officials on both sides say. The clash between these two worlds has been at the root of much of the confusion and frustration on both sides over the past two years.

The Greeks placed huge importance on face-to-face meetings, while the Germans felt most issues could be resolved remotely by phone or email.

Some Germans also point to the model of the Prussian bureaucrat, whose sense of pride in ensuring decisions taken at the highest levels of government are implemented speedily and to the letter, still runs deep in German ministries. It took a while for Berlin and Brussels to realize that a similar ethos did not exist in Greece. Far from it.

Often Greek civil servants, whose wages and benefits were being slashed to meet austerity goals imposed by Greece's international lenders, actively undermined the ministers they worked for, or operated at cross-purposes with other ministries, with whom they had little or no contact, several German officials said.

Under the guidance of EU and IMF bailout inspectors, the Greek government also made the mistake, the Germans said, of cutting the salaries of civil servants across the board and then later firing a portion of them, when it should have fired first and raised wages for those that remained to keep them motivated.

"They did everything in the wrong order," a senior ministry official in Berlin said.

The result was gridlock that often seemed inexplicable to the Germans.

"There is a wonderful tendency in Greece to wait until the last minute to do anything," an EU official, who is a German national, said. "Five minutes before 12 is too early. It has to be 30 seconds before 12 before they step into action."

BOTTOMLESS PIT

When Papandreou resigned late last year, former central banker Lucas Papademos stepped in to lead a unity government. He too was a disappointment, German and EU officials said.

At an early meeting in Brussels, European Commission President Jose Manuel Barroso pressed him to announce that he would make the fight against corruption his personal mission. But the Greek technocrat demurred and said Athens was preparing a new ethics law.

As 2011 ticked over into 2012, and Greek politicians began dragging their feet on fulfilling the conditions needed to win approval of a second rescue package, German politicians took to chastising them in public. Finance Minister Wolfgang Schaeuble was often front and centre, denouncing Greece on several occasions as a "bottomless pit".

In late January, at his prompting, German finance ministry officials floated the idea with their euro zone partners of imposing a "Sparkommissar", or budget commissioner, on Greece that would take control of its finances.

"Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the one-page paper read.

The proposal got a sharp negative response from other member states and was quietly dropped. But when Reuters and the Financial Times broke news of it on January 27th, it hit Greece like a hurricane, re-opening wounds dating back to World War Two, when the country suffered atrocities at the hands of Nazi occupiers.

In the weeks that followed, Greek protesters took to burning German flags and newspapers began publishing computer-generated pictures of Merkel in a Nazi uniform. Publicly, the German government played down the jibes, but behind the scenes officials seethed.

"We stayed quiet, but we noticed," one senior official said.

A nervous foreign ministry, concerned the German ambassador who was suffering from health issues was not up to the growing challenge, quietly pulled him out of Greece after one-and-a-half years in the job and sent him into retirement, sources in Berlin and Athens said. The ministry said it could not comment on personnel matters and declined to put Reuters in touch with the diplomat, Roland Michael Wegener.

Roesler too had grown fed up with the lack of progress on the Greek cooperation deal he had hoped would bolster his own battered image and arrest a precipitous slide in support for his Free Democrats (FDP), Merkel's coalition partner.

He had been pressing for regular updates, but embarrassed aides had had little to show him. On February 17th he received a status report and it wasn't pretty.

"It seems clear that the implementation is not a priority for the Greek side," the internal ministry paper, which was obtained by Reuters, read. "From a German point of view this is unacceptable. We need immediate, clear signals from the Greek side that the country is ready to accept our offers of support."

Frank Asbeck, the chief executive of Germany's second biggest solar company SolarWorld, had accompanied Roesler on the trip back in October and pledged, along with many of his peers, to help Greece with its ambitious Helios project.

Named after the Greek sun god, its goal was to transform Greece into a "showcase" of photovoltaic development in Europe's sunbelt. But to get German firms on board, the Greek government had been told, it needed to sort out its crude regulatory framework. This hadn't happened.

"We can only support this project if we work hand in hand with the Greek government. They have to step up and deliver," Asbeck told Reuters this week.

A senior official in Roesler's ministry bemoaned the missed opportunity. "What was always important was to get a symbolic breakthrough investment. We told the Greeks we just needed some kind of stone laying ceremony, that we'd send a minister down and that would get things going. It never came."

In a speech on Ash Wednesday in southern Bavaria, Roesler dropped all pretence and slammed the Greeks for failing to deliver on the promises made back in October.

It didn't take long for Chrysohoidis to hit back. "I realize Mr. Roesler has a terrible problem in the polls that show his party at 1.5 percent and he attacks Greece to become popular with the Germans," he told Greek television.

NO FREE LUNCH

Even if Roesler's grand plan had borne fruit, it surely would have been too little and too late to prevent the economic and political upheaval that ensued and continues to haunt Greece. If the radical left party SYRIZA, led by bailout-opponent Alexis Tsipras, emerges victorious in Sunday's election, the risk will rise that Greece could leave the euro.

A confidential wire by the German embassy in Athens warns of "turmoil in the markets" if Tsipras wins and "trouble in the streets" if he doesn't, a senior German official said.

After the experiences of the past year, some euro zone watchers believe Germany will be the first to open the exit door and give Greece a nudge. But that analysis may be too simplistic. The German EU official said regardless of who wins the Greek vote, a new government would be given a final chance.

"There will be a very clear 100-day plan for a new government. If it's not implemented in full, then the game is over," the official said. "This is a very bitter election for the Greek people. They are being asked to support the old guard that got them into this mess."

Others believe the hurdles to an exit are higher. A top European central banker said there was no way to force Greece out of the euro zone if it wanted to stay.

"Europeans can decide to turn off the money taps, in which case Greece defaults by September but it would still stay in the euro," he said.

"There is absolutely no trust in Greek politicians and an awareness that whoever wins, the Greek program will need to be renegotiated after the election. The question is how much Germany is willing to pay to keep Greece in the euro zone. Only Merkel and the politicians can decide that."

Kerber at the BDI believes Merkel cannot afford to let Greece leave because that could trigger uncontrollable contagion in the euro zone, with devastating consequences even for its star member Germany, whose booming exports depend on the health of its European partners.

Like a married couple that have come to loathe each other but remain together for the good of the kids, Germany and Greece may be stuck with each other for a while. This is a message Merkel will need to begin sending more forcefully to her domestic constituents after the Greek vote, Kerber said.

"Germany has to realize that it can't sell its goods to everyone else and run huge trade surpluses without assuming more responsibility and leadership in Europe to hedge its national interests," he told Reuters. "Being export champion for free simply doesn't work. As Milton Friedman once said, there is no free lunch."

(Reporting by Noah Barkin, Gernot Heller, Annika Breidthardt in Berlin, Dina Kyriakidou and Harry Papachristou in Athens, Daniel Flynn in Paris; editing by Janet McBride)

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