Tough talk and tough laws do not always mean tough action. That was a lesson learned during the 2008-2009 financial crisis, which resulted in billions of Euros of bailouts for struggling banks and financial institutions deemed ‘too big to fail’. It is perhaps also a lesson which will be repeated in the current Greek sovereign debt crisis, where the latter has been referred to as ‘too European to fail’. Despite tough talk from the German finance minister, Wolfgang Schauble, that it must, in principle, be possible for defaulting Member States to go bankrupt and ‘exit the monetary union’, Eurozone Members seem to be busy working out the details of a rescue plan. Whatever form that plan might take, it must meet minimum standards of legality and credibility without creating, as Otmar Issing – one of the founding fathers of the Euro- has argued, a ‘moral hazard of a dimension hardly seen before’.
When Greece adopted the Euro currency in 2001, it lost control over its monetary policy and agreed to comply with the terms of the Stability and Growth Pact (“SGP”), including keeping its national budget deficit within 3% of GDP and its government debt within 60% of GDP. In exchange for these commitments, Greece received a currency of impeccable credibility and stability and low long term interest rates. In the wake of the public spending bonanza during the recent financial crisis, however, the Greek government, as well as that of almost every developed nation in the world, went into the red. Greece’s fiscal deficit is now more than four times the SGP allowance, at around 12.7%, and its government debt is approaching 125% of GDP. This position is not just due to the crisis, but also to bad public finance administration over many years, not to mention plain dishonesty, as shown by the Commission’s January report on Greece’s consistent falsification of data to Eurostat. The question now causing panic throughout the Eurozone is simply: can Greece afford to finance its debt in the current economic climate or will it default? The decline of the value of the Euro over recent months has shown that the financial markets, at the very least, have their doubts.
In any case, Greece’s fellow Eurozone partners look as if they don’t want to wait and see. The consequences of letting Greece default would probably be waves of speculative attacks on other potential defaulters, an action likely to be self-fulfilling and massively damaging to the stability and prestige of the currency. In light of these dangers, the Eurozone is considering a ‘rescue’. But the immediate problem is legality: Article 125 TFEU, the so-called ‘no bail out clause’, forbids the Union or other Member States being liable for or assuming the commitments of any other Member State. However, Article 122 TFEU does allow the Council to grant ‘financial assistance’ to Member States in ‘severe difficulties’ caused by ‘exceptional occurrences beyond its control’. This last provision has been proposed as a possible legal basis, seemingly blaming the situation on the financial crisis. But Greece’s public spending frenzies over the last years and its poor record of tax collection is equal, if not dominant factors. The most likely form of a rescue package would seem to be the granting of loans or loan guarantees, not from the ECB, but from other Eurozone Members- with or without IMF collaboration. Furthermore, ‘loans’ rather than ‘bailouts’ reduces the ‘moral hazard’ of the intervention. Among the Eurozone leaders, Ms Merkel is in no mood to be perceived as bailing out a dishonest spendthrift. But other options than the above are either too extreme (expel Greece from the EMU) or too distant (create an EMF).
If expelling Greece is not an option, then letting it fail is not one either. The idea of an economic union without a political one was always going to be a challenge, and Greece represents a severe test. But with some coaxing of Germany, the Eurozone’s current Achilles’ heel can be put on ice rather than amputated, perhaps permitting it to one day run again. The years of lax enforcement of the SGP, however, are probably long gone.
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See the Commission report on Greece’s falsification of debt and deficit data to Eurostat, COM(2010) 1 final.