They cannot even organise a private meeting. How, then, can they solve a debt crisis? The bungling of a not-so-secret gathering of finance ministers in Luxembourg on Friday night provides an object lesson in how the politics of eurozone crisis resolution is going wrong.
We learnt this from a leak to Spiegel Online. The German news site’s story said Greece was considering leaving the eurozone, and that finance ministers were holding a secret meeting to discuss the issue. The story also offered the intriguing detail that Wolfgang Schäuble, the German finance minister, had a report in his briefcase warning him of the prohibitive costs of a Greek exit.
Earlier that Friday evening, the spokesman for Jean-Claude Juncker, the prime minister of Luxembourg who also has responsibility for finance, flatly denied that the meeting was taking place at all. That statement was obviously untrue. The meeting ended on Friday night with the announcement that there was no discussion on a Greek exit or a Greek restructuring. I very much doubt that this statement – or indeed any official statement on the eurozone crisis – was true either.
It is my understanding that this meeting, and numerous others preceding it, discussed the whole gamut of options, including, of course, a restructuring of Greek debt. But the fact that options are being discussed does not mean they are being pursued. I am fairly sure that Greece is not preparing to leave the eurozone, and that the European Union rejects an involuntary debt restructuring – for now that is.
The reason for the frantic diplomatic activity is that the eurozone is running out of easy options for dealing with Greek debt. There are valid objections to every proposal. An exit is too risky. A haircut – a loss for creditors on the outstanding principal – would kill the country’s banking system and land the European Central Bank with losses approaching €100bn. A voluntary restructuring would not do enough to reduce the net present value of Athens’ debt to a sustainable level.
I understand collateralised lending – swapping old Greek bonds into new collateralised debt at a discount – has also been discussed. This would subordinate every Greek bondholder, including of course the ECB. The option to swap bonds of the European financial stability facility, the rescue umbrella, into peripheral bonds has been explicitly rejected by Berlin. This would probably have been the cheapest option but Germany wanted to nip in the bud anything that smells of a eurozone bond.
The core issue in the eurozone crisis is not the overall size of the peripheral countries’ sovereign debt. This is tiny relative to the monetary union’s gross domestic product. The area’s total debt-to-GDP ratio is lower than that of the UK, US or Japan. From a macroeconomic point of view, this is a storm in a teacup.
The problem is that the eurozone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage. The “grand bargain” – a series of institutional agreements on eurozone sovereign debt by the European Council in March – did not address the resolution of the current crisis. That process is starting only now. Those responsible have realised that, no matter which debt management option they choose, it will cost taxpayers hundreds of billions. It is highly unlikely states will accept fiscal transfers of such a size without imposing extreme conditions on one another.
The political reason this crisis goes from bad to worse is an unresolved collective action problem. Both sides are at fault. The tight-fisted, economically illiterate northern parliamentarian is as much to blame as the southern prime minister who cares only about his own backyard. The Greek government played it relatively straight but Portugal’s crisis management has been, and remains, appalling.
José Sócrates, prime minister, has chosen to delay applying for a financial rescue package until the last minute. His announcement last week was a tragi-comic highlight of the crisis. With the country on the brink of financial extinction, he gloated on national television that he had secured a better deal than Ireland and Greece. In addition, he claimed the agreement would not cause much pain. When the details emerged a few days later, we could see that none of this was true. The package contains savage spending cuts, freezes in public sector wages and pensions, tax rises and a forecast of two years’ deep recession.
You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up. Europe’s political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable. This is not a debt crisis. This is a political crisis. The eurozone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back. We know Mr Schäuble has contemplated, and rejected, the latter. We also know that he prefers the former. It is time to say so.
This article first appeared in the Financial Times: