As most of you already know, Greece is in big, big trouble. Its deficits are enormous, its debts are larger, and its credit quality is so shaky that it may set a world record on the Richter Scale. For a while now, the consensus has been that larger, more solvent members of the eurozone would bail the country out. Greece’s creditors are saying, in effect, “Nice eurozone you’ve got there . . . shame if anything happened to it.”
And it would be. There’s no real mechanism for a country to exit the
eurozone. That is, from all accounts, deliberate–a currency zone
doesn’t work if you start with the assumption that countries may exit at
any time. The problem is, if a country is forced to exit, the process
is . . . well, let’s just say it’s disorderly. If Greece leaves
the currency union, the best case scenario is a local bank run and a
sharp jump in interest rates for euro-denominated debt, particularly
that issued by weaker members, as lenders start pricing in currency
risk. The worst case scenario is that Ireland, Spain, and Portugal also
suffer bank runs, forcing them to exit as well, which fatally weakens
the whole project.
This is why almost everyone expects the richer
members to eventually come through. The problem is, there’s also no
mechanism for delivering a bailout. Greece can’t
ask for one, because it thinks this would undermine the credibility
of its plan to reduce the deficit. (Note to Greece: this is like
Paris Hilton worrying that buying an Amy Tan novel might undermine her
reputation for intellectual seriousness). And Germany, the obvious
candidate to lead a bailout, is not eager to do so. So while everyone
knows this is going to happen, no one is quite ready to say, “Hey, we’re
going to hand Greece a bunch of money and get little in return except,
well, not having our currency zone broken.”
No one has the
authority to do the obvious: swoop in with a bunch of cash, in return
for which the Greek government gets put on a serious diet. I mean, they
can tell Greece to get its fiscal house in order, and
negotiations over this sort of thing are part of the reason for the
delay. But while they can force Greece to agree to austerity measures,
they can’t actually enforce them, other than with a set of fairly
pitiful sanctions. Which is why Greece is running such huge deficits in
the first place, even though the rules of the monetary union say that
deficits aren’t supposed to exceed 3% of GDP. Since it is entirely
possible that Greece will find itself in the same pickle ten years
hence, no one’s exactly enthusiastic about making this sort of
committment. Giving Greece money also gives markets the idea that
Greece is Too Big to Fail, which means that if Greece does end up in
trouble again, a bailout will be even more necessary.
None of
the choices are good. Thus we wait until everyone, including the
Germans, reluctantly concedes that there is no other way to get out of
this than to funnel money into the eurozone’s most profligate
government.
