The European Union has various rules in place to make sure that individual eurozone countries don’t end up paying to bail out other ones.
The rules are there for a reason. You can’t have one country running up huge debts, cheerfully chucking money at its public servants while barely bothering to collect any taxes, and then have it expect to be saved by the more responsible countries. Who would stand for such a thing?
Trouble is, the rules were always meant as a deterrent. The theory was that if the rules were there, no one would break them. Now Greece is in trouble, and it needs a bail out.
But the rules say no. So what do you do?
Simple – you do what everyone else does. Rip up the rulebook and tell the taxpayer to cough up…
Europe’s central bankers rip up the rulebook
In Europe, they’re steadily progressing down that path of least resistance that I mentioned last week (Why the euro is destined to crack up). For starters, the European Union and the International Monetary Fund have agreed to lend Athens €110bn in exchange for promises of tough spending cuts. And now, the European Central Bank has relaxed its rules on lending to the troubled country.
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A quick bit of background here. When the financial crisis hit, lending throughout the financial system dried up. So central banks around the world, in one way or another, agreed to accept various assets in exchange for cash loans.
The idea was that the central banks would only be accepting fundamentally sound assets, so there was essentially no risk to the taxpayer. It was just a matter of ensuring that the financial system could function on a day-to-day basis and get over its hiccup.
One of the big concerns as Greece has seen its credit rating slide, is that the European Central Bank (ECB) might no longer take its government debt as collateral. That would have caused big problems for Greek banks in particular – they hold around €45bn of Greek government debt.
So now the ECB has just said that it will accept junk-rated government debt. But only from Greece of course.
As Trevor Williams at Lloyds said in The Times: “The ECB had to do this to avoid mass bankruptcies in Greece. The Greek banks have been borrowing heavily from the ECB. Without this move, banks would have had trouble stocking up their cash machines, institutions would be struggling to meet day-to-day costs such as wages and bills.”
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This was always going to happen of course. When the Greeks still had the drachma and controlled their own monetary policy, the rest of Europe could just sit back and let them plot their own course to hell. But they don’t. And so, unless Europe decides to cut them loose – which is also against the rules – then they have to follow right in after them.
Germany is now responsible for the modernisation of Greece
But one thing’s for sure. If the Germans had ever really believed that the ECB was the natural successor to the stern-faced anti-inflation Bundesbank, they’ve been disabused of that notion now.
The Germans can console themselves with the fact that the markets now know that the euro is only as good as its weakest member. As an export-dependent country, that’s not such bad news for them. They get all the advantages of a Greek currency with a German economy powering along behind it.
But will that make up for the fact that they’re now committed to pitching in €22.4bn for a ‘loan’ (I put ‘loan’ in inverted commas because the correct word is almost certainly ‘gift’) to Greece? Germany has spent years paying for the integration and modernisation of East Germany, a process which is by no means finished. How will Germans feel now that they’re on the hook for the modernisation of Greece? And how will they feel when other countries come knocking?
Could this all be good for the eurozone in the long run?
Christine Lagarde, France’s finance minister, is already calling for “new criteria to monitor” the finances of eurozone members, as well as “advance warning systems.” There’s a clear choice here. Either the eurozone becomes a lot more integrated politically, with all the implications that has for countries seceding some control over their economic policies. Or it fractures into more manageable chunks.
The path of least resistance for the politicians – as it has been all the way along the euro project so far – is for further integration. So the question is this – just how hard are the voters going to make that for them?
Every population has its breaking point. The Greeks are on general strike just now. The country may have agreed to severe spending cuts as part of its deal to get that €110bn EU/IMF loan, but the local papers are talking of lenders drinking their blood.
This crisis might, as Hugo Dixon on Breakingviews.com suggests, be a great opportunity for the weaker members of the eurozone to “embark on radical reforms” to finally restructure their economies. In the long run “that would be hugely positive for the region’s unity and long-term competitiveness.”
But I wouldn’t want to bet on it being a smooth ride to get to that point.
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