Greece to the Eurozone’s Rescue

With Greece, the mistakes were legion. But a fresh start is now possible. Forgive the troika’s Greek debt. With a primary surplus—fiscal revenues abov

Publishing date
23 December 2014
Ashoka Mody

The European Commissioner for Economic and Financial Affairs, Pierre Moscovici’s unnecessary—and unseemly—visit to Athens served to spotlight Europe’s corrosive politics. Mr. Moscovici chose to all but endorse Antonio Samaras, the beleaguered Greek Prime Minister, who promises to play by the European Union’s dysfunctional rules. And the Commissioner described as “suicidal” the positions held by the opposition party Syrzia, which may well lead the next government and correctly deems the EU’s rules to be intolerant.

His boss, European Commission President Jean-Claude Juncker, weighed in by expressing his preference for Greece to be led by “known” faces.

Greece should not have been a member of the eurozone

Greece should not have been a member of the eurozone. But after the German Chancellor Helmut Kohl ensured Italy’s inclusion in May 1998, Spain and Portugal were waived in. So, the inevitable Greek entry came in 2002. By then, any vestige of economic good sense in the euro’s construction had been abandoned in the name of peace and friendship, a cause that Moscovici and Juncker presumably seek to promote.

From October 2009, when Greek authorities acknowledged that they had lied about their fiscal accounts, to May 2010, the claim was that the problem would go away without external help. When eventually the troika—the European Commission, the European Central Bank, and the International Monetary Fund—put together a large bailout fund, the manifestly untenable claim was that Greece would repay its private creditors in full. In July 2011, the repayment terms on the troika’s debt were eased, but it was too little too late. Large losses were eventually imposed on private Greek creditors but not before harsh austerity caused an extraordinary slump in growth and lasting misery.

Pretty much every time there was a choice between the right and wrong decision, the wrong one was taken.

Today, the only right way forward is for the troika to allow Greece to repay its official creditors in, say, 100 years. This will effectively mean debt forgiveness but the cosmetics may help German leaders tell their citizens that they will be repaid.

But, of course, the system fights back all rational thinking. Ireland and Portugal will yelp that they also deserve more relief on their troika borrowings. More fundamentally, the forgiveness will directly contravene the Lisbon Treaty’s no-bailout provision, which prevents one member state from paying another’s debts. That would call into question the constitutionality of the European Stability Mechanism, which was approved by the European Court of Justice on the basis that the loans from the facility would be repaid with an “appropriate margin.”

Through this crisis, Greece has been at the leading edge of testing the eurozone’s most idealistic goal: greater political unity

At some point, a new fork in the road has to be taken. Today, Greece offers an opportunity to modestly test the eurozone’s pressure points. The stakes are high not just for the resolution of the crisis but for the future shape of Europe. Through this crisis, Greece has been at the leading edge of testing the eurozone’s most idealistic goal: greater political unity. Moscovici’s visit to Athens accentuates just how far that goal has been setback.

It is easy to label the forces that wish to loosen European tethers as reactionary. But that does not help. These same debates are being played out in Spain and will inevitably appear in Italy, which is being sucked into a debt-deflationary cycle. The discordant politics will make the resolution of economic challenges ever harder, and the politics will grow every more discordant.

With Greece, the mistakes were legion. But a fresh start is now possible. Forgive the troika’s Greek debt. With a primary surplus—fiscal revenues above expenditures—and with now a very low public debt burden, Greece can start afresh with private creditors. The task of monitoring Greek fiscal accounts must shift from Mr. Moscovici’s office in Brussels—and from German officials—to private creditors.

Private creditors who will own newly-issued Greek debt will also unambiguously bear the burden of future defaults, ideally automatically and incrementally through sovereign “cocos,” (contracts that specify debt restructuring at pre-agreed levels of distress). A one-time violation of the no-bailout provision would be accompanied by a credible new no-bailout regime. And Greece will remain under pressure to reform and manage its public finances, but under a less politically-charged regime.

The euro’s credibility can be rebuilt only step-by-step

The euro’s credibility can be rebuilt only step-by-step. The time for grand gestures, such as quantitative easing by the ECB, has come and gone: little economic benefit will accrue.

Instead, Greece—which has been a source of endless disruption—can, for once, be the edge that leads onwards to a more fundamental change in the eurozone’s architecture. Loosening European ties and allowing countries some real flexibility in managing their national affairs may, in fact, be the only way of stopping the march of the most egregious forms of European nationalism. It may be the only way to give Greece a real chance—and it may be the only way to save the euro.

Read more:

A New Greek Test for Europe

Kohl's Euro

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