Geographies in Depth

Can the EU and Greece turn words into action?

Ashoka Mody
Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University.
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A most unusual thing happened at the February 11 meeting of Eurozone finance ministers. A piece of paper needed to be signed by all who were present. It had gentle words to satisfy all. For the “creditor” countries, it said that Greece would “explore the possibilities of extending the programme.” That was the softest way for the creditors to draw their red line. Even for the Greeks, who hate the word “programme,” the phrase “explore the possibilities” seemed a reasonable qualifier. The Greeks, in turn, sought “bridge” (interim) financing between the current programme and the one they hope to negotiate. For them, the phrase “bridge the time” seemed suitable.

Thus, it was something of a shock that a bogus agreement was not reached. A deep concern now prevails that there may be no words that satisfy both parties. Never mind the substance of the debate: how deep will the debt relief be, how much easing of austerity will occur? Instead, the consuming concern is whether adequate substitutes can be found for such words as “programme,” “troika,” and “extension.” That disquiet deepened after the February 16 failure to agree on yet another piece of paper.

It all started in October 1970 with the Werner Report, the blueprint of the incomplete monetary union within which the Eurozone now operates. Commenting on the Werner Report, Hans Tietmeyer, a former president of the Deutsche Bundesbank, pointed out the obvious: it was, he said, “an attempt to reconcile the irreconcilable.” The stark economic and political incongruity of the incomplete union—and the risks that entailed—stared at the reader of the Werner Report, but clever words were found that worked for all.

André Szász, a former senior Dutch central banker, brilliantly explained this phenomenon. In his amazingly insightful history of Europe’s incomplete monetary union, Szász, who was present at the inner deliberations from the Werner Report right up to the euro launch, postulated the following axiom. The Werner Report, he said, was:

“[…] a compromise not in the sense that member states resolved their differences by meeting each other on intermediate positions, but rather they agreed on documents which they felt left them free to continue to push for their own preference.”[1]

Such has been the recurring history of the euro: words and documents that carry completely different meanings for the different parties. But safe within the rhetorical trap, the process keeps going. The incongruities keep piling up.

Consider the words in the alleged February 16 proposal from the European authorities. It calls on the Greeks to:

“[…] make the best use of the existing built-in flexibility in the current programme.”

Ah! That wonderful word “flexibility.” It is—with apologies—so flexible. When Italian Prime Minister Matteo Renzi called for “flexibility” in the application of fiscal rules, German Chancellor Angela Merkelwas puzzled. What exactly is the problem, she wanted to know. There was, she insisted, flexibility built into the rules. It just came along with “guard rails” to prevent disorder.

Renzi complained for days. And then, lo and behold, the European Commission issued a new set of instructions with guidelines specified in matrices embedded in other matrices. Describing these as the new “simple” rules that would operationalize flexibility of the fiscal rules, the matter was settled. The Eurozone authorities, who had for days been threatening Italy with fearsome sanctions, declared victory. The never-before-used sanctions were once again stashed away for future empty threats.

Greece is important not just because the Greeks need relief—which is hugely important in and of itself—but because the Greek government also is insisting on changing the way Europe conducts business. Since October 2009, Greece has been at the leading edge of the Eurozone crisis. Each time, it has been brought back into the fold.

In early 2010, it was obvious to anyone who wanted to look—and there were plenty who did not want to do so—that Greek debt to private creditors would need to be restructured. Absent such restructuring, the staff of the International Monetary Fund (IMF)—one of diabolical “troika” along with the European Commission and the European Central Bank—found that Greek debt was not “sustainable with a high degree of probability.” Simply stated, Greece was drowning in debt. That would normally put a halt to the large IMF loan about to be extended to Greece. And many on the IMF’s Board of Executive Directors protested.

But there were words to help: “a systemic risk waiver.” More plainly put, the claim was that if losses were imposed on Greece’s private creditors, civilization as we know it would come to an end. Everyone fell into the policy-by-rhetoric mode.

And so, Greece received large official loans to pay off private creditors. And Greece accepted that Berlin, Brussels and Frankfurt would run its economy.

In summer 2012, a new Greek government came to power. Its mandate was to ease the burden of austerity on the Greeks. But it was the grow-up thing to disregard the democratic mandate.

Europe has long been run on a self-avowed “benign despotism”. The leaders always know the right way forward. This idea comes from Jean Monnet himself, the intellectual founder of Europe’s post-19thcentury state. He stated it directly:

“I thought it wrong to consult the peoples of Europe about the structure of a community of which they had no practical experience.”

Today, many commentators who subscribe to the Monnet doctrine remain bewildered with the Greek government’s insistence on sticking to their election promises. Why, they ask, is the government reluctant to tell the Greeks that the hopes raised were unreasonable after all?

The Greek government is challenging three European premises: (a) debt relief is a “no, no;” (b) democratic mandates are not a serious basis for negotiation and action; and (c) words can smooth over real differences. Of these three, it is this unwillingness to agree on words that is most galling.

For this reason, it is easy to sympathize with German Finance Minister Wolfgang Schauble. A veteran of European negotiations—and a senior member of German governments that have consciously bypassed the German citizen on matters related to the euro—for him this is all quite improper. He understandably exclaims:

“None of my colleagues have understood so far what Greece really wants in the end. Whether Greece itself knows is also the question.”

It is also easy to sympathize with German citizens who have been repeatedly told that the euro conveys no costs to them.

And so we come to these crossroads. The sharpest decline in public support for the European Union has come from among the youngest. For long, the young, although far removed from the shadow of the war, regarded Europe as a natural extension of their identity. The crisis has been harsh to them. Many are fleeing.

The new Greek prime minister was born well after the Werner Report was written, well after the Szász axiom came to govern Europe, well after it became customary to make compromises in documents that meant different things to different people.

Where others have failed miserably, will the new prime minister finally be the one to undermine the Szász axiom? If he does, that will be a victory for Europe. If he does not, the string of bogus deals to resolve the Greek crisis will continue. The stalemate will be escalated, with future resolutions increasingly more costly. The Greek tragedy will spread wider beyond its borders, and Europe’s Greek test will continue until the right answers are given

[1] André Szász, 1999, “The Road to European Monetary Union,” New York: St. Martin’s Press.

This article was originally published on Bruegel Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ashoka Mody is Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University.

Image: A European Union (E.U.) flag (front) and a Greek flag flutter in front of the monument of Parthenon on Acropolis hill in Athens. REUTERS/John Kolesidis
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Geographies in DepthGeo-Economics and PoliticsEconomic Growth
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