Policymaking in Medias Res

by Shane Fitzgerald

We have had the hamartia – the tragic flaw in the system that allowed high-spending countries to free ride on low interest rates. We have had the hubris – the belief the good times would never end. We have had nemesis – disaster. We now need the anagnorisis …

So says the proud Eurosceptic, classical scholar and Mayor of London, Boris Johnson. But the epiphany for which he yearns is “the moment of recognition that Greece would be better off in a state of Byronic liberation, forging a new economic identity with a New Drachma. Then there will be catharsis, the experience of purgation and relief.”

Opponents of the EU in the UK and elsewhere might enjoy a flood of cathartic schadenfreude at such an outcome, but a messy default and exit of Greece from the Eurozone would offer little relief to its beleaguered citizens, and do nothing to calm the broader crisis in which Europe finds itself engulfed.

Notwithstanding that any attempt to leave the Euro would summon possibly insurmountable procedural obstacles, the consequences would certainly be grim. The Economist notes a few likely results including bust banks, a plummeting New Drachma, soaring inflation, even more onerous debts and the thorny problem of who on earth would lend to Greece to service them.

Nor would the situation in the Eurozone be much improved. The contagion risk from a default and exit would be far bigger than from a restructuring alone. If Greece can leave, the market logic would whirr, why not Portugal or Ireland, Spain or Italy? What would even raising those prospects do to a still bruised global economy?

For, as we know, this is much more than a Greek drama. The backdrop rotates with each new sequence – now Athens, now Dublin, now Lisbon. Behind the scenes, furiously attempting to redraft the script as they go along, we find Berlin and Paris, Brussels, Frankfurt and Washington DC. The markets intone their ominous chorus. The pace and urgency of events seem to be driving towards a denouement, but nobody knows how the strands of this story will be brought together in a satisfying conclusion. If the tale is one, as Chancellor Merkel asserts, of “a struggle between politics and the markets”, then what remains unclear is how our valiant democrats hope to beat, or even appear to beat, those dastardly financiers. The latest solution proffered by France is to ask banks to roll over their Greek bonds, a plan which has superficial appeal, but, as the Financial Times concludes, “seems designed less to make Greece’s situation more sustainable than to help banks offload risk from their balance sheets.”

Polish Prime Minister Donald Tusk, once had ambitious plans for his country’s six-month Presidency of the EU, which begins today. However, this week he has offered a smaller agenda, focusing on crisis management, while drawing attention to a loftier goal.  The moment of realisation that he seeks is one that will “rebuild trust and faith in the idea that Europe makes sense – that the EU is truly a worthwhile invention”. Yet across the continent, bickering protagonists and spiky domestic sub-plots threaten to skewer even that simple notion.

Meanwhile, back in Brussels, the European Parliament, the Council of government ministers and the EU’s executive Commission have been frantically negotiating to agree compromises on a package of measures designed to increase the scrutiny of national economic policies at EU level and so bolster confidence in the Eurozone overall. They are almost there, but the Parliament is holding out for a couple of measures that would increase member states’ accountability to it and make sanctions on misbehaving governments more automatic. National leaders and finance ministers are reluctant to cede any more autonomy but MEPs have the strong support of the European Central Bank, which is adamant that a ‘quantum leap’ forward in economic governance is necessary to prevent a sequel to the crisis.

This is important, sensible stuff, but no matter how radical the plan (and it is quite a departure), or speedy its implementation, it is the result of the type of deliberative, consultative process on which the EU has been built but which has been found lacking in the teeth of its current troubles. Planning ahead is well and good, but of less use when the immediate future is so uncertain.

What is more pressingly required is a bold intervention that addresses Greece’s solvency problem by restructuring just enough of its debt for it to be able to survive, adapt and build a healthy economy. This would both demonstrate political solidarity and set an important precedent by involving private investors in a meaningful way. But it is anathema for key players such as the ECB owing to concerns of financial stability, and also to governments that will face the wrath of voters if they are forced to again tap public funds to recapitalise exposed banks or to write off commitments made through the IMF and EU rescue funds. But the alternatives are dire and getting worse. You can only kick the can down the road while you have road. A decision will have to be made, and soon.

The Economist concludes the above-mentioned article by saying that Eurozone leaders ultimately have three options:massive cash transfers to Greece; a disorderly default that would destabilise markets; or an orderly debt restructuring.”This last option would entail a long period of external support for Greece, greater political union and a debate about the institutions Europe would then need. But it is the best way out for Greece and the euro.”

European leaders are trapped between two trilemmas so none of this is easy but none of it will get any easier. Perhaps they are busy praying for their own deus ex machina?