« L'Europe se fera dans les crises et elle sera la somme des solutions apportées à ces crises »—Jean Monnet
What to do with Greece? the question is, seven years on from the outbreak of the Ellenic Greek crisis, still unanswered. Many options were tried, by all sides: austerity; debt haircut; reform packages for competitiveness; populism-via-referenda; etc. None seems to work. Now that the great majority of Ellenic debt is in the hands of the ECB- that could, thanks to its monetary sovereignity, write large shares of it off with a swift of pen- the calls for debt relief are multiplying by many sides; Most recently, John Hopkins’ professor Erik Jones who calls, in a column on his website, for a debt relief that would be both morally just and technically efficient. As in other matters (cf, Eurobonds) I agree with Jones, although with some caveats. Indeed debt relief would solve the troubles Greece is facing at the moment, giving to its economy (hampered, if nothing else, by a massive primary budgetary surplus) some breathing space for enacting socially-inclusive policies without harming the newfound financial sustainability (since once interest payments are zeroed, Greece has margins for fiscal espansion without debt accumulation).
This, of course, would come at a price- namely, twin-moral hazard.
The first instance of moral-hazard would be horizontal, due to crossborder “contagion”. The message would be clear, to Greece and others: article 123 TFEU, prohibiting monetary financing, is no longer in force. The moral hazard should be self-evident: if the Greeks had their debt forgiven, why not the Italians, the French, and by Jove the Germans as well? All these countries have important debt burdens to service, and it is not clear to me why the Greeks should be favoured in the game of debt relief once the principle that prohibits monetary financing has been suspended, weaknened, or simply eliminated from the European Constitutional agreement.
Furthermore, given the structural tendency of the Greek economy towards economic mismanagement in the last 40 years, (I’d suggest the great book of Eleni Panagiotarea at this regard-here my JCMS summary ) what would prevent Greece (or any other coutry following the Greek example) to start overspending again after a while, thus reproducing the very same problems that existed before? surely, if the fiscal space bought through debt relief is used wisely for competitiveness-enhancing reforms, the amount of debt the “new Greece” would be able to sustain could be substantially increased. Yet there is no insurance that those reforms would happen; that they would not be undone at the first occasion; and that the same would apply in other countries as well.
It appears to me that if debt relief is to happen and if it is to remain a special arrangement for this particular historical moment (were it for Greece alone, or for multiple countries) a change in the allocation of competences would be equally required: in other words, debt relief is not consistent or credible with continued competence of the nation states on fiscal and economic policy. If Eurozone countries were willing to pool sovereignity on fiscal and economic matters, then a true debt relief – accompained by the creation of a “European safe asset”- could become a reality; otherwise the moral-hazard, both horizontal and intertemporal, would be overwhelming. This could mean that a “sixth trilemma” is to be added along the other five in my general model of integration; It also means that debt relief remains unrealistic today, although- with a fresh French President proud, and not afraid, of the F. word- this might just be a little closer than before.
*I am grateful to David Bokhorst from UVA for having discussed this over and over with me. It helped quite a lot to clarify a couple of ideas!
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