When Greece was on the brink of euro exit: disaster averted, lessons learned

Ten years ago, between 25 June and 12 July 2015, the euro area went through arguably the most momentous events of its 25-year history. Greece was in the midst of a debt crisis and was at loggerheads with its creditors. The government of Alexis Tsipras wanted to reject the rescue proposals of the European Commission, the European Central Bank and the International Monetary Fund, and called a referendum on the issue, for 5 July.

Voters backed the government, but the gamble failed. The end result was a politically painful compromise between Greece and its creditors that retained most of the creditors’ conditions. This averted Greece’s exit from the euro area – which had been floated by Germany’s finance minister.

The backdrop to the crisis was the overhaul between 2010 and 2015 of euro-area political and institutional governance to correct some of the omissions in the Maastricht Treaty, which provided the basis for the single currency. These omissions largely stemmed from the tension between national sovereignty and either supranational institutions or collective decision making.

Bailing out highly indebted countries was off limits under the treaty, and there were no instruments to counteract the increasing difficulties that Greece (and later others) faced in financing their budgets at acceptable rates. The 1990s belief that a highly integrated monetary union could not face a capital account crisis in individual member countries had precluded the setting up of internal safety nets.

Coordination of macro-economic policies was too narrow and asymmetric, lacked enforcement procedures and focused nearly exclusively on fiscal issues, while national statistics remained a black box. Banking supervision and resolution remained national prerogatives. There was no lender of last resort for sovereigns because of Maastricht limitations on the European Central Bank.

In Greece’s case, these shortcomings were exposed when the deficit was discovered to be over 15% of GDP in 2009 and debt was very high. To bring debt servicing costs into sustainable territory, either massive debt relief or lending at very low interest rates was needed, or spending had to be cut and taxes raised substantially. Greece’s fiscal problems were also a direct consequence of rapidly declining competitiveness and a highly clientelist state. The various support programmes had to reckon with this harsh reality.

Ten years on, what has been learned from the crisis? 

It is clear that the euro area avoided a potentially catastrophic mistake. Greece’s pull back from the brink of euro-area exit (and Brexit subsequently), laid to rest the idea that countries could threaten exit as a blackmail tactic.

The EU and euro area are now better prepared, with an array of instruments that permit greater confidence about success were a similar crisis to occur. Banking supervision and resolution are more strongly integrated. The European Stability Mechanism, set up to lend to crisis-afflicted euro-area countries, is ready as ever to provide financing at AAA-interest rates. And the ECB’s set of monetary instruments provides a shield against the risk of contagion.

For further integration, more trust must be built. A clearer balance of rights and obligations, especially in good times, needs to be generated. This should take the form of better coordination between national budgets and the EU budget, creating a basis for enhanced risk-sharing. The EU budget should be strengthened and reoriented towards funding for European public goods in the economic and security areas, financed by new resources and by issuing common bonds. An EU savings and investment union would also strengthen risk sharing and enhance euro-area resilience. As the EU enlarges, and is confronted with some members retreating into nationalist politics, differentiated integration speeds involving only some EU countries may be necessary.

The 2015 Greek crisis showed starkly that sharing monetary sovereignty is an existential choice: its political ramifications are all-encompassing both for a country under stress and for the rest of the EU. Responsibility and solidarity go hand in hand. This implies that political integration cannot take place by stealth.

Clearly, the EU – and thus the euro area – is and will remain for the foreseeable future a union of member states that have ceded a certain amount of sovereignty to collective decision-making. Core responsibilities and powers remain with the national sovereigns. There are currently strong geopolitical arguments for more European integration, but the showdown ten years ago showed how high the costs can be when greater integration is forced by circumstances in a situation where trust is lacking. This is the main lesson from the Greek crisis.

In July 2015, Marco Buti was Director-General for Economic and Financial Affairs at the European Commission, Klaus Regling was Managing Director of the European Stability Mechanism, and Thomas Wieser was President of the Eurogroup Working Group. A longer version of this article is available here.