When the euro was young, then-president of the European Central Bank Wim Duisenberg stepped up to receive an accolade on behalf of the fledgling currency.
Accepting the 2002 Charlemagne Prize, he channeled the early 20th-century advocate of continental integration Aristide Briand, saying the success of the single currency both relied on and embodied the solidarity and mutual confidence of the European project. Thirteen years later, with Greece under capital controls and a hair’s breadth from exiting the euro, that idea is close to expiring.
Throughout the region’s debt crisis, current ECB President Mario Draghi has shown a willingness to push the central bank to act as a broad lender of last resort, a bulwark of confidence for a currency he’s said is “irreversible.” Yet he has always sought backing from Europe’s political masters -- and that may be precisely the backstop he’s lacking to save Greece.
“The idea was to create an irrevocable monetary union that once you’re in, it’s forever,” said Charles Wyplosz, professor of economics at the Graduate Institute of International and Development Studies in Geneva. “The permanence is very much in doubt, especially because you really don’t have a lender of last resort. Under certain circumstances, the central bank can drop you.”
Draghi’s desire for political cover helps explain why he’s trying to strike a balance between generosity and miserliness, allowing emergency loans to Greek banks while warning that they can be cut off at any moment.
On Wednesday, the Governing Council decided to leave the level of Emergency Liquidity Assistance that it grants to Greek banks unchanged, signaling it intends to wait for a July 5 referendum in Greece over the terms of the European Union-led rescue.
It also left the discounts imposed on collateral the Greek banks present at the current level, according to a Greek official familiar with the discussion. That decision was taken even after the country missed a $1.7 billion payment to the International Monetary Fund that was due June 30.
A GPO poll on Tuesday cited by euro2day.gr said 47 percent of Greek voters are leaning toward a “yes” vote, supporting the rescue, with 43 percent opposed.
Greek Finance Minister Yanis Varoufakis will resign if the “yes” camp wins, he said in an interview with Bloomberg on Thursday. He said he would still help his successor navigate the country’s crisis.
The turmoil has highlighted how weak a currency union can be when the readiness of the central bank to assist isn’t assured, and fiscal backstops are restricted.
“Sovereign countries in the end can always choose to exert their sovereignty,” said William White, an adviser to the Organization for Economic Cooperation and Development. “The feeling was that once you are inside, the difficulties in withdrawing would be such that nobody sensible would do it.”
Draghi has made himself perfectly clear about how permanent the euro is supposed to be.
“If one country can potentially leave the monetary union, then this creates a replicable precedent,” he said in Helsinki in November. “The euro is, and has to be, irrevocable in all its member states, not just because the Treaties say so but because without this there cannot be a truly single money.”
Yet after more than five months of turmoil, U-turns and mutual recriminations since the election of the Syriza-led government in Greece, the euro is looking rather less irreversible.
Benoit Coeure, an intellectual heavyweight on the ECB’s Executive Board, said this week that Greece exiting the euro “can unfortunately no longer be ruled out.” That’s the first time a top policy maker has been so accepting it could happen.
Even one of the founding fathers of the ECB now has a tone of resignation.
“The illusion was and is that having joined the euro, it is irreversible,” said Otmar Issing, the German who in 1998 became the central bank’s first chief economist. “Mutual trust is certainly not there any more and it will be very difficult to restore it.”
Issing argues that if Greece exits, other countries will have to pull themselves together to make sure it doesn’t happen again. He represents the school of thought, echoed by German finance minister Wolfgang Schaeuble, that says the greater danger to the euro is the loss of credibility should the bloc bend its rules too much.
“If the Greeks can get away with the violation of all promises, commitments, then I think it will have a contagion effect on other countries,” Issing said. “Then we’ll be entering into a monetary union very different from what was intended. It will be the end of the zone of fiscal solidity.”
Disagreement on Principle
There is a tension in Europe between those, like Wyplosz, who see the need for an unambiguous lender of last resort, and those, such as Issing, who prefer a community of the self-reliant adhering to jointly-agreed rules.
In the meantime, and lacking a political breakthrough, the ECB can’t ignore that tension much longer. Greece owes the ECB 3.5 billion euros ($3.9 billion) on July 20.
If the ECB did want to be a lender of last resort for the euro, it would have to tolerate non-payment by Greece, even though that would attract accusations of monetary financing of governments, which is banned by European Union law. If it instead decides to uphold the letter of the European treaties, it has to accept that it’s accelerating Greece’s path out of the euro.
“If things get really challenging, and there’s absolutely no other way to get through, then the central bank has to step in,” Wyplosz said. “The problem of the ECB is that they have built-in conditions for doing this or doing that.”
Outside the region, the idea that Europe doesn’t have the solidarity to act to preserve the integrity of the union is hard to understand.
Letting Greece leave is “not an experiment I would like to run,” former U.S. Treasury secretary Larry Summers said in Bern on Monday. “A family is never the same when a child leaves the family. And a euro area that is revocable rather than irrevocable is going to be a very different institution than the one that it was conceived to be.”