Eurozone leaders agreed Thursday to a 109 billion euro ($157 billion) bailout of Greece. Athen's second bailout in a little more than a year includes substantial private-sector participation with Europe's banks contributing about a third of the total package. The nature of the banks' contribution is not clear, but they will likely swap current Greek government bonds for new ones with longer maturity dates and lower yields. A default will likely be declared by credit rating agencies, although Athens will probably only remain in a state of default briefly.
While the Greek bailout carried the news, the most significant results of Thursday's eurozone meeting were changes made to Europe's 440 billion euro bailout fund, the European Financial Stability Fund (EFSF). The fund will now be able to extend a credit line to eurozone countries without first negotiating a bailout, allowing it to get ahead of future crises. The EFSF can now also fund banks in troubled states through loans to governments and directly buy government bonds on secondary markets.
The EFSF is not large enough to use these tools simultaneously throughout the eurozone. However, the threat that the fund will swoop in to selectively purchase government bonds and issue credit lines to governments will force investors to think twice before betting on the eurozone's collapse or the collapse of one of its peripheral members.
More important than the technical details of the EFSF's changes are its symbolic effects. Just 12 months ago, Germany vociferously opposed granting the EFSF these - or similar - powers. Berlin did not change its mind now because of the danger to the Greek economy. It did so because the situation in Greece finally affected countries that matter - Italy and Spain, in particular.
Berlin changed its position for two reasons. First, the banking sector's participation in the new bailout of Greece gives German Chancellor Angela Merkel some ammunition to defend against the claim by her conservative base that German taxpayers are footing the bill for Greek profligacy. Merkel can now entertain the populist demand that banks pay the price for allowing Greece to be profligate in the first place.
Second, and more importantly, Germany is slowly coming to terms with the idea that regional hegemony comes at a price. As STRATFOR stated in February 2010, "if Germany wants its leadership to mean something outside of Western Europe, it will be forced to pay for that leadership - deeply, repeatedly and very, very soon." Berlin indicated Thursday that it has no interest in abandoning its sphere of influence, namely, the eurozone. Anyone looking to bet against the euro, eurozone bonds or its peripherals needs to be aware that doing so means betting against Berlin.
The problem for Germany is that the eurozone's sovereign debt crisis is not the only crisis in Europe. There is a crisis of confidence brewing east of Germany. With two states in the eurozone and others considering entry, Central European states are skeptical of Germany's commitments to their security in the face of Russian resurgence. NATO's ability to act as a guarantor of security is fraying and thus far, Germany has been largely unwilling to step into that vacuum. Throughout the economic crisis, Berlin has shown itself willing to incur costs to provide economic guarantees to its sphere of influence, despite populist backlash at home. The question is whether it is willing to incur similar costs to provide security guarantees.
Germany has only recently returned as a regional power. It takes time for a country to remember what the costs and benefits of regional hegemony are. Preserving the eurozone comes with an economic cost. Expanding and reinforcing Germany's hegemony in Central Europe may come with a cost as well, but not a monetary one. Hegemony may necessitate a reconfiguration of Berlin's relationship with Moscow.