This is where Greek deception gives way to German myth—laced with elements of both tragedy and farce. Schäuble’s remedy of Greece’s malaise could hypothetically work if the rebuilding of the trust that investors had in Greece before the crisis could return, and reduce rates to the 5% level they were before the crisis—if not to parity with current German rates, which are effectively zero. But that is patently not feasible when Greece’s government debt ratio has risen from under 120% before the crisis to over 170% now.
Rates on Greek bonds had fallen from almost 30% in 2012 to 6% in mid-2014, but blew out to 7.5% even before the Greek election was called, and when the Troika’s austerity program was being imposed by the pre-Syriza government. At its minimum—before Syriza became a factor—servicing Greek government debt required 12% of Greek’s GDP (see Figure 3). Total government spending in most OECD economies is only two to three times this amount. No OECD government could survive having to spend 33-50% of government revenue on interest payments alone; how then could Greece, with its rampant tax evasion, ever hope to service this amount?