Greece is heading for default. If France and Germany decline to help, the eurozone—and Europe—could face disasterby Wolfgang Munchau / June 22, 2011 / Leave a comment
Published in July 2011 issue of Prospect Magazine
Riot police guard the National Bank of Greece, Athens. Violent protests against the government’s austerity measures have paralysed the city
The eurozone is based on three pillars: loopholes, fudges and lies. They made this crisis inevitable. The propensity to fudge now makes any real resolution all but impossible, even if it contains the problem.
The fudges and loopholes stretch back to the deals that created the euro in the early 1990s. The Maastricht Treaty, in force from 1st November 1993, committed signatories to the new currency, which came into existence on January 1999. The eurozone’s advocates made promises that were inconsistent, but irresistible. The Germans were promised that monetary union would not oblige them to pay their tax revenues to other countries, and that it would create a currency at least as strong as the Deutschmark. The French perceived the euro to be a tool to strengthen Europe’s global reach. For the Italians and the Spanish, the new currency offered permanently low interest rates. Given their deregulated banking systems it also brought sudden wealth by way of a housing bubble.
These inconsistent promises were reflected in the governance of the currency bloc. There was no attempt to co-ordinate countries’ tax and spending policies other than through broad budget rules (soon broken). The most important was the famous 3 per cent ceiling: the maximum budget deficit that a country would be allowed compared to its gross domestic product (GDP). The philosophy was that monetary and fiscal discipline should be sufficient for the euro’s long-term sustainability. The independent European Central Bank (ECB) would adjust interest rates to contain inflation. The “stability and growth pact,” which aimed to co-ordinate national policies within the euro area would enforce fiscal discipline. And that was it.
The lies, loopholes and fudges gave rise to another trinity: no exit, no default, and no bailout—a logically inconsistent set. The pledge not to bail out troubled economies was enshrined in European law. The no exit principle is an indirect consequence of Maastricht: there is simply no procedure for a country giving up the euro once it has joined. In theory, the country could leave the euro only by the “nuclear option” of withdrawal from the EU. The principle that a eurozone country will not default—fail to make payments on its debt—is not in the treaty. But it followed once the ECB accepted each country’s collateral on the same terms—that is, treated their debt as equally risky, even though the economies were so different.