Blog post

Greece and the André Szász Axiom

A most unusual thing happened at the Feb. 11 meeting of Eurozone finance ministers. The leaked draft agreement between the official creditors and Gree

Publishing date
25 February 2015
Ashoka Mody

A most unusual thing happened at the February 11 meeting of Eurozone finance ministers. The leaked draft agreement between the official creditors and Greek authorities had gentle words to satisfy all. The creditors drew their softest redline: the Greek authorities would, they said, “explore the possibilities of extending the programme.” For the Greeks, who hate the word “programme,” the phrase “explore the possibilities” seemed a reasonable qualifier. Also as a concession to the scarred Greek psyche, the diabolical “troika”—the International Monetary Fund, the European Commission and the European Central Bank—was not even mentioned. The Greeks, in turn, sought “bridge” (interim) financing until a new deal could be worked out. The phrase “bridge the time” seemed suitable. 

It was bit of a shock when the Greeks walked away. The consternation deepened after the February 16 failure to agree on yet another piece of paper.

Thus the officials and financial press celebrated after the Friday, February 20 agreement. The word “programme” was replaced by the acronym “MFFA,” or the “arrangement;” the “troika” will be called “institutions;” and “bridge the time” survived. But faced with a bank run—fostered, in part, by threats from euro area authorities—Greece conceded much ground. 

The Italian Finance Minister Pier Carlo Padoan celebrated: "We are all winners. I say this without rhetoric: it is a great step forward for Europe.” Words were found to satisfy all. But, make no mistake, the central issues of debt relief and reduced austerity must be revisited. One more time, the history of the euro area is being replayed.

It all started in October 1970 with the Werner Report, the blueprint of the incomplete monetary union within which the Eurozone now operates. Commenting on that Report, Hans Tietmeyer, a former president of the Deutsche Bundesbank, stated the obvious. It was, he said, “an attempt to reconcile the irreconcilable.” The glaring economic and political incongruity of the incomplete union—and the risks that entailed—stared at the reader of the Werner Report, but clever words were found that worked for all.

André Szász, a former senior Dutch central banker, brilliantly explained this phenomenon. In his amazingly insightful history of Europe’s incomplete monetary union, Szász, who was present at the inner deliberations from the Werner Report right up to the euro launch, postulated the following axiom. The report, he said, was:

“[…] a compromise not in the sense that member states resolved their differences by meeting each other on intermediate positions, but rather they agreed on documents which they felt left them free to continue to push for their own preference.”'(1)  

Such has been the recurring history: words and documents that carry completely different meanings for the different parties. But safe within the rhetorical trap, the process keeps going. The incongruities keep piling up.

All international agreements are fuzzy, some might rightly point out. And, indeed, the fuzziness is needed to ultimately achieve progress.

This approach, however, does not work for the euro. Embedded in its construction is a fundamental conflict of interests among the member nations. No nation is willing to pay for the “mistakes” of others. The process may keep going but convergence of interests is not achieved. Instead, although temporarily hidden, the economic and political pressures accumulate, only to forcefully reveal themselves at moments of crisis. 

Many congratulated each other when words papered over the differences to launch the euro. The Szász axiom was a warning not heeded.  

The February 20 agreement has the classic European imprint. The Greek authorities, it says, must make the 'best use of the given flexibility'

The February 20 agreement has the classic European imprint. The Greek authorities, it says, must make the: “[…] best use of the given flexibility …”

Ah! That wonderful word “flexibility.” It is—with apologies—so flexible. When Italian Prime Minister Mateo Renzi called for “flexibility” in the application of fiscal rules, German Chancellor Angela Merkel was puzzled. There was, she insisted, flexibility in the rules. They just came with “guard rails” to prevent disorder. 

Renzi complained for days. And then, lo and behold, the European Commission issued new, “simple” instructions with matrices of criteria folded into other matrices. Italy won a modest concession on austerity. The Eurozone authorities, after days of threatening Italy with fearsome sanctions, declared victory. The never-before-used sanctions were again stashed away for future empty threats.

Greece is important not just because the Greeks urgently need relief, but because the Greek government is insisting on changing the way Europe conducts business. 

Since October 2009, Greece has done Europe’s bidding. But no good has come out of that process. The debt burden has grown and youth unemployment has soared to nearly 60%. 

In summer 2012, a Greek government came to power with a mandate to ease the unrelenting austerity. But disregarding its democratic mandate was the grown-up thing to do.

Europe has long been run on a self-avowed “benign despotism” of enlightened leaders. This idea comes directly from Jean Monnet himself, the intellectual founder of Europe’s post-19th century state:

“I thought it wrong to consult the peoples of Europe about the structure of a community of which they had no practical experience.

Today, those who subscribe to the Monnet doctrine are bewildered by the Greek government’s insistence on sticking to its election promises. Why, the commentators ask, is the government reluctant to tell the Greeks that the hopes raised were unreasonable after all?  

For this reason, it is easy to sympathize with German Finance Minister Wolfgang Schauble, a veteran of European negotiations and a senior member of German governments that have consciously bypassed the German citizen on matters related to the euro. For him this was all quite improper. He understandably exclaimed:

“None of my colleagues have understood so far what Greece really wants in the end. Whether Greece itself knows is also the question.”

It is also easy to sympathize with German citizens who have been repeatedly told that the euro conveys no costs to them. A 1999 pamphlet from Schauble’s Christian Democratic Union asks: “What does the euro cost us? Does Germany have to pay for the debts of other countries?” Its reply: “A very clear no!”

Now we come to these crossroads. The sharpest decline in public support for the European Union has come from among the youngest. For long, the young, although far removed from the shadow of the war, regarded Europe as a natural extension of their identity. The crisis has been harsh to them. Many are fleeing. 

Renzi and the Greek Prime Minister Alexis Tsipras share the same cause: unrelenting austerity is politically unacceptable. They both represent a generational change in leadership. Both were born well after the Szász axiom came to govern Europe, well after it became customary to make compromises in documents that meant different things to different people. They are more willing to challenge the perpetual austerity and loss of national dignity required in the incomplete monetary union. 

If Tsipras undermines the Szász axiom to achieve meaningful relief and Greek sovereignty, that will be the real victory for Europe

In his more dire condition, if Tsipras undermines the Szász axiom to achieve meaningful relief and Greek sovereignty, that will be the real victory for Europe. If he does not, bogus driblets of relief to Greece will come with more austerity. And, as U.S. President Barack Obama recently warned, “You cannot keep on squeezing countries that are in the midst of depression.” The stalemate will be escalated, with future resolutions increasingly more costly. The Greek tragedy will spread wider beyond its borders, and Europe’s Greek test will be repeated until the right answers are given.

This blog post was updated on 24th February 2015.

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About the authors

  • Ashoka Mody

    Ashoka Mody is the Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments. He was responsible for the IMF’s Article IV consultations with Germany, Ireland, Switzerland, and Hungary, and also for the design of Ireland's financial rescue program. Earlier, at the World Bank, his management positions included those in Project Finance and Guarantees and in the Prospects Group, where he coordinated and was principal author of the Global Development Finance Report of 2001. He has advised governments worldwide on developmental and financial projects and policies, while writing extensively for policy and scholarly audiences.

    Mody has been a Member of Staff at AT&T’s Bell Laboratories, a Research Associate at the Centre for Development Studies, Trivandrum, and a Visiting Professor at the University of Pennsylvania’s Wharton School. He is a non-resident fellow at the Center for Financial Studies, Frankfurt and the Center for Global Government, Washington D.C. He received his Ph.D. in Economics from Boston University.

    Declaration of outside interests 2014

    Declaration of outside interests 2015

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