Down and out in Athens and Brus­sels

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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