Opinion: Greek debt crisis a hazard for EU

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The World

WASHINGTON — The Greek membership of the eurozone has never been easy.

While other EU countries either adopted the euro or chose not to do so, Greece was the only EU country that wanted to join the common currency area at the outset, but could not.

The Greeks were keen to jettison the drachma because of their past experience with inflation and devaluation. Giving monetary authority to the European Central Bank would eliminate those two problems.

The rest of the eurozone, however, kept Greek ambitions in check for two years because of concerns over Greece’s fulfillment of the Maastricht criteria, which includes stringent limits on the levels of inflation, budget deficits and national debt.

Eurozone members worried that Greece was not sufficiently committed to fiscal rectitude. They were right. Soon after Greece joined the euro, in 2001,  it emerged that the Greek government lied about its deficit. Like Max Bialystock in "The Producers," the Greeks simply cooked their books.

The eurozone is a strange beast. While the monetary authority (to print money) rests with the German-dominated CEB in Frankfurt, fiscal authority (to borrow and spend) rests with the individual national governments. True, the Maastricht treaty sets out limits on national budget deficits and national debt, but those have been watered down and, sometimes, ignored. (The French come to mind.) So, in its defense, Greece is not the first eurozone country to give financial responsibility the middle finger.

That separation of fiscal and monetary policies creates an interesting problem. A country may enjoy monetary stability that comes from the combined strength of the eurozone’s 16 economies and from the credibility of the ECB, while at the same time undermining that very stability and credibility by having an unsustainable fiscal policy.

And that is precisely what happened when it became apparent that in addition to its national debt of 113 percent of the GDP, the Greek government has, yet again, lied about its budget deficit. The Greek discrepancy was hardly a rounding error, the deficit was 12.7 percent of the GDP in 2009 and not 4 percent as previously declared.

What is the solution? One option is for the Greek government to significantly cut spending. Considering the mass protests in recent days, the markets are understandably skeptical about the Greek government’s ability to do so.

Another option is to let the Hellenic Republic — and other spendthrift countries like Spain and Portugal — default on its debt and suffer the financial consequences. The last option is to bail Greece out with the money of German taxpayers or some other financial guarantees.

The bailout of Greece would create a massive moral hazard problem. It would signal to the rest of the eurozone that it is OK to run up huge debts because it will be bailed out in the end. Worse, a Greek bailout would likely encourage more deficit spending. It would be like going into a five star restaurant after being told that somebody else will pick up the tab. Under such conditions only a fool would not order caviar followed by lobster and washed down with Dom Perignon.

The European political establishment has too much riding on the euro, however. To the European elite, the eurozone is about much more than economic efficiency. The euro is a pillar of an ever closer political and economic union. That is why the eurozone can only be allowed to expand, but it cannot be allowed to shrink. And that is why — unless the usually docile German taxpayers revolt — Greece will be bailed out in the end.

But, what is to be done about moral hazard?

“I am convinced that any eurozone problem will be in the future interpreted as a consequence of the lack of harmonization … and that will lead to another wave of a creeping harmonization,” wrote Czech President Vaclav Klaus in 2004.

The sage of Prague was right. All indications are that in return for a bailout, the Greeks will be forced to jettison much of their fiscal autonomy and adopt a reform package penned in Frankfurt and Brussels.

If history is any guide, the Greek crisis — and solutions for it — will then be used to increase regulation of the fiscal policies of the eurozone members. The European bureaucrats, after all, have always been keen to centralize more power in their hands. The beauty of a decentralized political system is that it allows its component parts to chart their own course. Some countries succeed and some fail — providing the rest with valuable lessons about accomplishing the former and avoiding the latter.

Centralization of power at the European level is a good idea only if one assumes that the eurocrats will get policies right all of the time — a very unlikely scenario. If they get policies wrong, the whole of Europe — not just Greece — will suffer.

Marian Tupy is a policy analyst with the Cato Institute’s Center for Global Liberty and Prosperity specializing in the study of the political economy of Europe and sub-Saharan Africa.