Greek Crisis

No Way Out

Griechenland Im Wasser versinkend_distortion
The Hellenic Problem: there is no coherent insolvency plan for insolvent states.
  • Why it matters

    Why it matters

    The European Union needs to make sure there is a way for failing countries to leave the euro zone.

  • Facts

    Facts

    • In 1867, Greece  joined the Latin Monetary Union with France, Belgium, Italy and Switzerland.
    • It was thrown out in 1908 for mismanaging its currency
    • The Euro zone has no provisions for a clean exit.
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  • Audio

    Audio

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Greece accounts for less that two percent of the economic output of Europe, but requires 97 percent of the political attention. It is an imbalance that irritates many people: the sad result of five years of rescue policies, and it is easy to wonder what the point of it all is.

Most Germans can now very well imagine a euro zone without Greece: In their minds eye, everything will be better then. Most Greeks want to remain in the currency union. In their minds eye, everything would be worse then. Europe is the continent of reciprocal expectations.

It is clear that the European project is flawed, the political architecture skewed. The question is now, as things are coming to a head and Angela Merkel is trying to rescue what can still be saved, what can we learn from all the drama?

We must ask ourselves why we agreed to a European political system and process that does not include adequate sanctions for wrongdoing,  the ability to expel delinquents, and that does not have any kind of insolvency statutes.

Companies and private individuals who disappear into debt have to follow a path mapped out for them.  The public could see first-hand what happened to Lars Windhorst,  who rode the 1990s financial boom with his company Windhorst Electronics and then went bust in a very public way.

The story of Leo Kirch, the media mogul who went bust and then sued Deutsche Bank for causing his troubles, is still playing out in Germany in the court room.  And when Anton Schlecker’s drugstore business went bust, it came as no surprise that the Schlecker stores were closed and sold off.

But no one knows what will happen to badly managed countries in the euro zone. One of the big failures of the political elites was that they recognized this danger five years ago when the Greek crisis first began, and did nothing to plan out a road map for the crisis. 

The same people are still in charge. Angela Merkel was among the leading voices in 2010. The German finance minister was called Wolfgang Schäuble then, as he is now. We were told at the time that Mr. Schäuble had been working on some sort of grand plan in the case of a sovereign default. No one mentions that anymore.

The biggest misconception of the euro zone is that Greece belongs to it as it is the “cradle of democracy.”

Now, at the pinnacle of another crisis, Mr. Schäuble is allegedly working on something again, but nobody knows exactly what. It’s like the Loch Ness monster of politics.

We need a concrete plan. What is the procedure for a default? How should debts be forgiven in the case of default and how should outstanding claims be handled? A European institution or the Paris Club, which is experienced in such matters, could act as an insolvency manager.

Economists have long developed outlines for what to do. The Banking Union, the European Stability Mechanism, the Stability Pact and Fiscal Compact, all of these hard-won successful E.U. innovations of recent years would only then become completely effective.

The second issue with Greece is that it makes it clear that we need a review of the currency union’s agreements. At the moment it is a club you cannot leave, even if you have not paid your dues. This is totally different to normal life. Every marriage can end in divorce, every football club can be shut down, one can leave political parties, NATO and the Church.

But not the euro zone. One can also not be thrown out.

This set-up leads to economic exploitation, to a “moral hazard.” It makes the shapers of the euro vulnerable to blackmail. The government that has been ruling in Athens for half a year, with its professor of game theory as finance minister, has migrated toward a politics of maximum cumbersomeness, to a fundamental opposition to a reform agenda.

After the financial crisis, major banks cried out: “You must rescue us, because we are too big and there is a risk of contagion.” The previous government in Athens tried with good conduct to negotiate better terms from the money lenders of the E.U., the ECB and the IMF. It always attempted to transform credit into gifts. It tried to achieve a fair, productive system. It failed.

The biggest misconception of the euro zone is that Greece belongs to it as it is the “cradle of democracy.” But all its democratic achievements took place more than 2,000 years ago. Since then, Greece has been part of the Ottoman Empire. It once had a Bavarian King, the hapless King Otto who was unable to resolve Greece’s economic problems. 

It has even managed to destabilize a monetary union: in 1867, it joined the Latin Monetary Union with France, Belgium, Italy and Switzerland, but was thrown out in 1908 for mismanaging its currency. It was readmitted two years later, but by then the entire union was on its last legs.

In the modern age it has been ruled by the military and by a clutch of families more concerned about themselves than the country. Democracy? Res publica? That needs more time.

However, the European idea is larger than the question of who is currently governing in Athens. The new escalation of the debt crisis shows that the euro zone needs better arrangements for sovereign defaults. That is true regardless of whether or not Greece remains in the club.

 

To contact the author: jakobs@handelsblatt.com

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