Merkel Returns to Greece as Germany Eases Up on Euro Area

By Patrick Donahue and Ian Wishart  Apr 11, 2014 11:15 AM GMT+0300

Germany is signaling its focus on austerity may be easing as Greece begins its rehabilitation with international investors.

Chancellor Angela Merkel travels to Athens today for talks with Prime Minister Antonis Samaras, a day after Greece’s first bond sale in four years was oversubscribed. A joint news conference is scheduled for 6:30 p.m. Athens time.

The trip by the policy maker blamed from Ireland to Greece for deepening Europe’s north-south economic gap with austerity comes after Merkel backed France’s deficit plans and offered support to Italian Prime Minister Matteo Renzi.

“Germany is more ready to contemplate a little extra leeway, if the structural reforms are serious,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a phone interview. “Germany is not in favor of moving the targets, but is ready to accept it if it sees serious reforms. So there is a gradual shift in Germany.”

Merkel and Samaras will sign an accord for each government to commit 100 million euros ($139 million) to a planned Greek business-development bank, the Handelsblatt newspaper said today, citing government officials it didn’t identify. Schaeuble already pledged that amount in loans directed at Greek companies during a visit to Athens in July.

As the debt crisis that began in Greece wanes, Merkel is pointing to signs of recovery in the country at its epicenter. She’s also pushing for European Union unity as conflict with Russia over Ukraine eclipses four years of euro-area discord.

German Finance Minister Wolfgang Schaeuble this week expressed understanding for France’s budget deficit, after Merkel gave a hopeful stamp of approval to Renzi, who has pledged to enforce the euro area’s limit on budget deficits.

Car Bomb

Merkel’s visit to Athens contrasts with her last trip in October 2012, when anti-austerity protesters massed outside the Greek parliament and placed the capital in lockdown.

Even so, a car bomb exploded outside a central-bank building in Athens yesterday in a reminder of the upheaval affecting the EU’s most indebted country. No one was injured, police said. Some 5,000 police officers are on duty for Merkel’s visit, according to the in.gr news website.

“We have some difficult years behind us when it comes to the debt crisis, but we can see first successes,” she said in a speech to German lawmakers this week. “We should not trivialize these successes, even though we certainly haven’t reached the end of the road.”

Greece sold 3 billion euros ($4.2 billion) in five-year bonds at a coupon of 4.75 percent yesterday. Orders exceeded 20 billion euros, Samaras said in a nationally televised speech.

Budget Surplus

Greece’s economy, beleaguered by unemployment and deflation, may have the longest road ahead. Joblessness fell to 26.7 percent in January from a revised 27.2 percent in the previous month and consumer prices fell 1.5 percent from a year earlier, data released yesterday show.

One success is a budget surplus before interest costs of almost 3 billion euros ($4.2 billion), which the government expects the European Union to confirm this month.

Merkel has repeatedly said that Greece’s pain is worth the strides toward recovery and lauded efforts by Samaras’s government to enact wage cuts, tax increases and privatization.

Greece’s return to markets rekindled a public obsession with European government-bond yields born in the debt crisis that resonated from the pavement cafes of Paris to the pubs of Dublin and the piazzas of Milan, as people fixated on the type of financial data that had previously just been the preserve of economists and politicians.

Austerity Fatigue

Greeks’ patience for the austerity measures and an economy that has shrunk by about a quarter since 2008 will be tested in local and European Parliament elections next month. A poll this month showed the main opposition Syriza party with 21.5 percent support, ahead of Samaras’s New Democracy party at 20.8 percent. A defeat in European elections could threaten Samaras’s national coalition.

“A failure of the economy to show further signs of recovery may reignite political instability, which remains the main source of risk” to investors, economist Giada Giani at Citigroup Inc. wrote in an April 8 report.

To contact the reporters on this story: Patrick Donahue in Athens at pdonahue1@bloomberg.net; Ian Wishart in Brussels at iwishart@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Tony Czuczka