As an EU-IMF package for conditional assistance to Greece takes shape, reactions from the market have not been favourable. With the threat of default still looming, European taxpayers are unsure how the cost of this assistance will affect them. German citizens in particular are disgruntled that they will have to pay for another countrys mistake- a scenario they were assured by their politicians would never occur thanks to the strict rules of the Maastricht treaty and the Stability and Growth Pact. Bruegel Director Jean Pisani-Ferry and Senior Fellow André Sapirexplain why Germany may have to shoulder part of the blame for the crisis in Greece by not addressing crisis management and only focusing on crisis prevention.
After two months of acrimonious discussion, it is now likely that an EU-IMF package of conditional assistance to Greece is going to be activated in the coming weeks. Markets however did not react well to the agreement last week on the size of the EU package and the terms of lending: spreads on ten-years government bonds have risen to new heights. Bondholders visibly anticipate that some sort of eventual debt restructuring and perhaps also that government involvement will likely make their own claims less senior than official lending. So the default that assistance was meant to avoid is still threatening and nobody can say whether there will in the end be a cost to be borne by the European taxpayer.
This possibility is a cause for worry for citizens throughout Europe but it is visibly German citizens who are the angriest. As everyone else they do not rejoice at the prospect of paying for another country’s mistakes, but they are also angry for two other reasons. First, they feel that they have been cheated by their politicians who had promised that such a situation would never happen thanks to the strict rules of the Maastricht Treaty and the Stability and Growth Pact. Second, they feel that they had to tighten their belts after the adoption of the euro to regain competitiveness and they do not see why the Greeks can't do the same.
It is true that the developments of the Greek affair look like the chronicle of a nightmare foretold. It is true also that even after the principle of assistance had been agreed by the EU leaders (in spite of German reluctance) they were told that it was only meant to impress markets, not actually to be used. But Germany itself must share some of the blame for the situation.
First, legitimate insistence on crisis prevention through European fiscal rules and EU surveillance served as an excuse not to think about crisis management. But fires occur even with the best sprinkler systems, and you need a fire brigade to put them out. The very notion that preparing for crisis management would amount to recognising that crisis prevention rules exist to be circumvented was mistaken. In the end, a fire brigade had to be assembled in a hurry.
Second, Germany itself contributed to weakening the crisis-prevention system. It contributed to the assault on the Stability and Growth Pact in 2003 and, perhaps more importantly, it liaised with others to weaken its implementation. The Greek problem could have been uncovered much earlier, had the EU ministers agreed on a thorough audit of the country’s public accounts. So it is not for lack of tough sanctions that the mess was created, rather because down-to-earth, mundane policing was not exercised. Third, Germany was happy to improve its competitiveness vis-a-vis other countries in the euro area and failed to see that the corresponding loss of competitiveness of Greece and others was in fact undermining the very sustainability of these countries’ participation in the euro area.
In the end however interdependence cannot be eschewed. Had Germany refused to take part in the assistance lending to Greece, Greece would have gone to the IMF without Germany
(and other EU countries) having a direct say on the conditions for assistance. And it might have decided for a default, at a high cost for the creditor banks of Northern Europe. It is natural therefore that despite all its reluctance Germany is participating in an EU/IMF lending programme – it is in fact in its best national interest.
The harsh lesson from the crisis is in the end that the ‘never, ever any assistance’ philosophy was an illusion. Does it mean that more disciplined countries, especially Germany, must accept that others can draw on their resources at will? No. First of all, the very expectation of possible assistance strengthens the hands of the potential lenders considerably. Before the Greek crisis the notion that a euro area member could default was an abstract one: ‘we are no Argentina’ was an easy reply to those expressing concerns. We have learned there are potential Argentina’s in the euro area and this justifies even more exercising control over the partners’ public finances. So the possibility of a bail-out may paradoxically strengthen, rather than weaken, fiscal discipline rules and their enforcement. It is high time to use this opportunity to reinforce crisis prevention.
Second, as it is now conceivable that a euro-area country will end up negotiating with its creditors in the Paris Club as Mexico and Pakistan did in the past, the EU would be well advised to think ahead and agree on principles for such renegotiation. This requires setting rules for seniority and also determining who is entitled to set the terms of a standstill, of a rescheduling, or of the reduction of an ailing country’s debt obligations. At the beginning of the 2000s, an IMF proposal for a ‘Sovereign Debt Restructuring Mechanism’ whereby a public, quasi-judicial authority would have fulfilled that role was widely discussed. Intense Wall Street lobbying led to its burial. As the public debt of several countries, including Greece, is overwhelmingly held by residents of other euro-area countries, there is now a strong case for devising a similar European mechanism. This would counterbalance the debtor’s temptation to expropriate the foreigners, and the creditors’ temptation to postpone the day of reckoning.
The authors are respectively director and senior fellow with Bruegel, the Brussels-based European think tank.