Down and out in Athens and Brussels
The Greek catastrophe commands the world’s attention for two reasons. First, we are deeply distressed to watch an economy collapse before our eyes, with bread lines and bank queues not seen since the Great Depression. Second, we are appalled by the failure of countless leaders and institutions – national politicians, the European Commission, the International Monetary Fund, and the European Central Bank – to avert a slow-motion train wreck that has played out over many years.
If this mismanagement continues, not only Greece but also European unity will be fatally undermined. To save both Greece and Europe, the new bailout package must include two big things not yet agreed.
First, Greece’s banks must reopen without delay. The ECB’s decision to withhold credit to the country’s banking system, and thereby to shutter the banks, was both inept and catastrophic. That decision, forced by the ECB’s highly politicised Executive Board, will be studied – and scorned – by historians for years to come. By closing the Greek banks, the ECB effectively shut down the entire economy (no economy above subsistence level, after all, can survive without a payments system). The ECB must reverse its decision immediately, because otherwise the banks themselves would very soon become unsalvageable.
Second, deep debt relief must be part of the deal. The refusal of the rest of Europe, and especially Germany, to acknowledge Greece’s massive debt overhang has been the big lie of this crisis. Everyone has known the truth – that Greece can never service its current debt obligations in full – but nobody involved in the negotiations would say it. Greek officials have repeatedly tried to discuss the need to restructure the debt by slashing interest rates, extending maturities, and perhaps cutting the face value of the debt as well. Yet every attempt by Greece even to raise the issue was brutally rebuffed by its counterparties.
Of course, as soon as the negotiations collapsed two weeks ago, the truth about the Greek debt began to be stated. The IMF was the first to break the silence, acknowledging that it had been urging debt relief but to no avail. The United States then let it be known that President Barack Obama and Treasury Secretary Jack Lew had been trying to convince German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble to offer debt relief to Greece, also without success.
Then even Schauble himself, by far the staunchest opponent of debt relief, admitted that Greece needed it; but he also claimed that such relief would violate European Union treaty provisions barring bailouts of governments. Following his remarkable acknowledgment (made publicly only after utter catastrophe had struck), Merkel herself opined that perhaps certain kinds of relief (such as cuts in interest rates, rather than in the debt’s face value) could do the job in a way that would be consistent with EU rules.
The fact that the Greek debt overhang was acknowledged only after negotiations had collapsed exposes the deep systemic failures that have brought Greece and Europe to this point. We see a European system of crisis management that is fraught with ineptitude, extreme politicisation, gamesmanship, and unprofessionalism. I certainly do not mean to excuse Greek clientelism, corruption, and mismanagement as ultimate causes of the country’s predicament. Yet the failure of the European institutions is more alarming. Unless the EU can now save Greece, it will not be able to save itself.
The EU today operates something like the US under the Articles of Confederation, which defined the US’s ineffectual governing structure after independence from Britain in 1781 but prior to the adoption of the Constitution in 1787. Like the newly independent US, the EU today lacks an empowered and effective executive branch capable of confronting the current economic crisis. Instead of robust executive leadership tempered by a strong democratic parliament, committees of national politicians run the show in Europe, in practice sidelining (often brazenly) the European Commission. It is precisely because national politicians attend to national politics, rather than Europe’s broader interests, that the truth about Greece’s debt went unspoken for so long.
The Eurogroup, which comprises the 19 eurozone finance ministers, embodies this destructive dynamic, meeting every few weeks (or even more frequently) to manage Europe’s crisis on the basis of national political prejudices rather than a rational approach to problem-solving. Germany tends to call the shots, of course, but the discordant national politics of many member states has contributed to one debacle after the next. It is the Eurogroup, after all, that “solved” Cyprus’s financial crisis by partial confiscation of bank deposits, thereby undermining confidence in Europe’s banks and setting the stage for Greece’s bank panic two years later.
Amid all this dysfunction, one international institution has remained somewhat above the political fray: the IMF. Its analysis has been by far the most professional and least politicised. Yet even the IMF allowed itself to be played by the Europeans, especially by the Germans, to the detriment of resolving the Greek crisis many years ago. Once upon a time, the US might have pushed through policy changes based on the IMF’s technical analysis. Now, however, the US, the IMF, and the European Commission have all watched from the sidelines as Germany and other national governments have run Greece into the ground.
Europe’s bizarre decision-making structure has allowed domestic German politics to prevail over all other considerations. And that has meant less interest in an honest resolution of the crisis than in avoiding the appearance of being lenient toward Greece. Germany’s leaders might rightly fear that their country will be left holding the bill for European bailouts, but the result has been to sacrifice Greece on the altar of an abstract and unworkable idea: “no bailouts.” Unless some rational compromise is agreed, insistence on that approach will lead only to massive and even more costly defaults.
We are now truly at the endgame. Greece’s banks have closed, its debt has been acknowledged as unsustainable, and yet the future of both the banks and the debt remains uncertain. The decisions taken by Europe in the next several days will determine Greece’s fate; wittingly or not, they will determine the EU’s fate as well.