The No-Bailout Principle
Posted by hkarner - 15. August 2016
Source: The Wall Street Journal
A euro in a Greek bank is clearly worth less than a euro in a German bank. The Greek bank and the Greek government are simply more likely to go belly-up.
Back in February 2010, with the Greek government’s borrowing costs climbing to new heights, Nobel Prize-winning economist Joseph Stiglitz—then an adviser to the Greek prime minister, George Papandreou—called for eurozone authorities to intervene in markets and “teach the speculators a lesson.” Greece had no need of a bailout, he said, no need of the International Monetary Fund (IMF). “There is clearly no risk of a default.”
Three months later, Greece accepted its first bailout package, amounting to $120 billion. To date it has received financial assistance, in the form of loans and write-offs for private-sector bondholders, amounting to $450 billion.
Reading Mr. Stiglitz’s “The Euro: How a Common Currency Threatens the Future of Europe,” one gets no sense that he ever considered the Greek tragedy anything other than inevitable. “Successive governments,” he writes, “had run unconscionable deficits.” And the eurozone, which Greece joined in 2001, was an unforgiving home for such a spendthrift. It was built on the idea of each state for itself in fiscal affairs; there would be no bailouts. The belief was that European governments would run their economies so as to avoid any risk of the financial markets cutting them off. And just to make extra-sure, legally binding deficit limits were imposed.
But even fiscally prudent countries like Ireland and Spain blew through these limits when property busts wrecked their banks and sent unemployment soaring after 2008. Mr. Stiglitz is clear on who and what are at fault for the suffering that followed: Germany and its euro, created in the Prussian image of austere and merciless self-discipline.
“Truth,” Oscar Wilde said, “is one’s latest mood.” And Mr. Stiglitz’s mood is very different now than it was in 2010, when he was advising Greece. Then, saving the country was a matter of burning “speculators.” Today, the crisis was inevitable. “Europe’s travails,” he tells us, are owing above all to “one underlying mistake: the creation of the single currency.”
“The Euro” is Mr. Stiglitz’s 19th book since he resigned as the World Bank’s chief economist in 2000 after a stormy three-year tenure. It surveys the continuing crisis, makes a case that the euro was misconceived and that present policies are only making things worse, and charts “a way forward” on reform. What stands out, however, is the relentless indictment of past and present stewards of the eurozone, whom he charges with committing every possible sin against progressive economic principles. In this, the book reads much like Mr. Stiglitz’s earlier ones on globalization and inequality—only now with the euro as chief villain.
There are, first, the sins of commission—policies imposed on countries in crisis to contain deficits and increase labor-market flexibility. These have fueled inequality, which has in turn—Mr. Stiglitz insists—hurt growth. This is a proposition that even fellow Nobel laureate and liberal icon Paul Krugman doesn’t buy. But no matter.
Then there are the sins of omission—the policies that would have helped but were never pursued. Mr. Stiglitz tells us, for example, that the eurozone’s “crisis countries” needed reforms “responding to the reality of climate change.” And the green investments that they should have made with Northern Europe’s money “would have improved current accounts by lowering the cost of energy.” This is a proposition that even President Obama rejects, having openly acknowledged that carbon-emission reduction schemes are likely to raise fuel and electricity costs, not lower them. Again, just a detail.
Mr. Stiglitz gives the sinners sobriquets like “neoliberal,” “market fundamentalist” and “gold bug.” He alleges that some of them—nameless, of course—have confessed their sins to him. “Increased unemployment in the crisis countries,” he says, was actually part of their master plan. “Secretly, many in the Troika” of Greece’s creditors—the European Commission, the European Central Bank (ECB) and the IMF—“thought of this as almost a necessary means to the long-run end of making the euro work.” He even hints at official corruption in the currency’s management, reminding us that ECB president Mario Draghi “had spent years at Goldman Sachs” (three, to be exact).
Even for the sympathetically minded, the book will be a bit of a repetitious slog. But for patient readers, there are moments of amusement. These come particularly when Mr. Stiglitz plays at evenhandedness. He suggests, for example, that Europe needs to embrace a “diversity” of views. “Some societies,” he explains, “may prefer more stability and better systems of social protection, and greater expenditures on public education and health; others,” in contrast, “may be more committed to preserving existing inequalities.” That’s right; some people want to live in a Great Society, while others want to stop upward mobility and social progress.
But for all the polemic, many of Mr. Stiglitz’s most damning observations are on target. He is right that Germany’s insistence on Greece slashing spending and raising taxes in the midst of plummeting output, in return for new loans with which to pay off the old, has been a catastrophic economic, social and political failure. Piling more debt on bankrupt nations doesn’t work—it didn’t work after the last century’s two world wars, and it isn’t working now. Germany, of all nations, should know this.
The bailout doesn’t even merit the term “aid,” since the self-interest was so transparent. In March 2010, two months before the announcement of the first Greek bailout, European banks held $149 billion of Greek debt: $62 billion of this was French; $37 billion was German. The $120 billion in Troika loans to Greece was therefore largely a backdoor bailout of European banks. French ones were subsequently able to eliminate almost all of their Greek exposure by selling bonds, allowing them to mature and then taking partial write-offs in 2012.
But the Greek saga, however tragic, doesn’t in the end tell us that much about the euro’s original sins. Mr. Stiglitz writes that “Greece would likely not have borrowed in German currency” had it remained outside the eurozone, “precisely because it (and its lenders) should have been aware of the risk that that entailed.” This is nonsense. Developing countries have long borrowed massively in U.S. dollars despite the risks to them and their lenders. And in 2000, a year before Greece joined the eurozone, 79% of outstanding Greek debt was already in euros—and only 8% in drachmas. There would have been a debt crisis irrespective of whether Greece adopted the single currency as its own.
There are equally powerful reasons to question Mr. Stiglitz’s central criticisms of the eurozone. For example, did the European Central Bank’s “mandate to focus only on inflation” really cause it to pursue too tight a monetary policy? The bank’s mandate is to target inflation “below, but close to, 2%.” Inflation has been below that level for the past three and a half years and is currently near zero. If ECB policy is too tight, it is clearly not because it has been slavishly meeting its mandate. It has been moving farther and farther away from it.
At times, Mr. Stiglitz wants to have his cake and eat it too. He criticizes the ECB for “resist[ing] quantitative easing (QE) . . . long after policymakers in the United States and Japan had augmented their tool kit with QE.” Yet he argues elsewhere that the most important effect of QE has been negative—contributing to “growing inequality,” which (he says) hurts growth.
Mr. Stiglitz believes that for a monetary union like the eurozone to succeed it needs a political, fiscal and banking union. In the U.S., a dollar in an Arkansas bank is as good as a dollar in a New York bank because each is protected by credible federal deposit insurance. A euro in a Greek bank, by contrast, is clearly worth less than a euro in a German bank. The Greek bank and the Greek government insuring it are more likely to go belly-up. Greek euros are also more likely to be forcibly turned into drachmas than German euros—the way U.S. dollars in Argentine banks were turned into pesos in 2001.
It is worth recalling, though, that at that very moment, while Greece was joining the euro, Ecuador and El Salvador were unilaterally installing the U.S. dollar as their sole currency, and it has remained so securely ever since. There was, and has been, no support from the United States—no political, fiscal or banking union. Currency unions can work with just a credible “no bailout” principle. The problem is that the principle has not been upheld in the eurozone.
Still, it is hard to deny Mr. Stiglitz’s conclusion that “the eurozone as a whole has done poorly.” “The lesson,” as he sees it, “is that markets are complex institutions [and that] simplistic tinkering, based on ideology rather than a more profound appreciation of how markets actually work, without a deep understanding of their complexities, can lead to disastrous outcomes.” So if only Joseph Stiglitz could control the creation and distribution of money, in the service of “societal well-being,” the world would be a better place. But until then, we have the consolation of knowing that he will write more books to remind us.
—Mr. Steil, director of international economics at the Council on Foreign Relations, is the author, most recently, of “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.”