Greece and Germany Agree the Euro Can't Work
Ahead of Monday's European Union summit, the only thing you can rule out is a happy ending. Whatever happens at the leaders' meeting -- even if a deal of some sort emerges -- the EU has suffered lasting and perhaps irreparable damage. The available choices run from bad to terrible.
The costs to Greece and to the EU of a default followed by Greece's ejection from the euro system could be huge. But even if the worst doesn't happen, Europe has suffered a total breakdown of trust and goodwill. That can't easily be undone -- and it's a dagger pointed at the heart of the entire project.
Related: Greece Default Watch
Two things, I believe, will strike historians as they look back on this collapse of European solidarity. The first is that the principals were able to draw such a poisonous dispute out of such an easily solvable problem. The second helps to explain why that was possible: Greece and its partners fell out thanks to a delusion they have in common -- the idea that sharing a currency can leave fiscal sovereignty intact.
On the eve of the summit, the economic distance between Greece and its creditors is small. Differences over fiscal targets have narrowed down to timing -- what happens next year rather than the year after -- and fractions of a percentage point of gross domestic product. There's even tacit agreement that further debt relief will be needed as part of a successor bailout program, though the creditors won't discuss the details until the current program is completed. That's a procedural rather than substantive issue, and it simply shouldn't matter.
The problem is that the creditors don't trust Alexis Tsipras and his Syriza ministers to hit the targets they might sign up to. The creditors don't even trust them to try. They want firm commitments to specific policy changes -- tax increases and new retirement rules to cut pension spending -- that Tsipras has promised not to accept.
Again, the revenue these policies would generate is small in relation to the fiscal adjustment Greece has already achieved and to the forecasting errors involved in all such calculations. It isn't the numbers that separate the two sides. Greece and the creditors are standing on principle, and oddly enough it's essentially the same principle -- that of sovereignty.
Greece has had enough of being dictated to by the rest of the EU. Of course, its government wants debt relief and a milder profile of fiscal adjustment -- and that's justified, because without them the Greek economy will recover too slowly, if at all. But more than debt relief and softer fiscal targets, Greece wants to be back in charge of its own policy. Its years under the creditors' supervision have been terrible. Being force-fed any more of their medicine is what the country rejected when it voted for Syriza.
The creditors believe in sovereignty just as much. They don't think their taxpayers should be on the hook for Greece's failure to balance its books. They too have a point. The sovereignty Greece demands shouldn't come at others' expense. Responsible sovereign governments recognize a budget constraint: They see there's a limit to how much they can safely borrow. And if they exceed it, they, not their neighbors, suffer the consequences.
What neither side will acknowledge is that monetary union, if it's going to work, has to infringe the sovereignty of creditors and borrowers alike. Without national currencies and interest rates to act as shock absorbers, fiscal flows across borders are necessary to help smooth out economic fluctuations. This needn't mean a permanent flow of subsidy in one direction; it does mean temporary reversible flows from countries with low unemployment to countries in recession. In the particular case of Greece, it requires from the creditors further patience and fiscal support.
If this is what Germany and other creditors are ruling out when they say they will have no part of a "transfer union," the euro system will be permanently biased toward stagnation.
But the essential quid pro quo is that borrowers must accept limits on their fiscal freedom as well -- or else the consequences of reckless borrowing are borne by other members of the currency area. There's the deal: To make monetary union work, some limited sacrifice of fiscal sovereignty is necessary on both sides.
The EU's efforts to address this problem with mechanical fiscal rules have failed at every step. Now, by stirring so much mutual contempt, the Greek crisis may have put the solution permanently out of reach. Pooling of fiscal sovereignty -- an expression of political solidarity -- is what both sides in this quarrel have set their faces against, and with steadily mounting fervor.
Greece isn't willing to do what it takes. Nor is Germany. Nor, after four months of being called pillagers and criminals by Tsipras, are the other creditors. Yet don't say they disagree. All through this crisis, there has been more agreement than meets the eye: They have agreed, it seems to me, on the impossibility of making this system work.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.
- Mueller Is Ending the Era of Impunity for Washington's Foreign Lobbyists
- How to Blow North Korean Missiles Out of the Sky
- Trump Jr. Might Be Too Much Even for India
- 'Low-Yield' Nukes Are a Very High Threat
- Russian Meddling Worked, But We Don't Know How Well
- Trump, Carter and Democrats' 2020 Prospects
- President Trump, I'm Russian and I'm Not Laughing