Which countries owe Greece money

Debt crisis in the European Union

The Greek crisis is growing into a danger for the entire euro area. How should the European Union react to this? She finds herself in the dilemma between bailout and punishment of the "deficit sinner". The first seems inevitable for the continued existence of monetary union, the second is necessary to avoid moral hazard.

Limited Warranty Rescue

Kai A. Konrad

States with high debts are vulnerable to their lenders. You are literally at their mercy. They have to repay a large part of their total loans each year and finance these repayments with new loans. According to its own information, the Federal Finance Agency, which handles this business for the federal government in Germany, expected in December 2009, for example, to sell new loans amounting to 343 billion euros in 2010. As is well known, this is considerably more than the net new debt. If the lenders no longer trust a state and the state cannot find buyers for its debt instruments to refinance the old debts, it is comparable to terminating the credit lines. Then, literally, bankruptcy occurs.

This was the situation that Greece ultimately faced in the first few weeks of 2010. Within a few weeks, the risk premiums - compared to the interest rates in Germany, for example - that Greece had to offer creditors in order to buy its debt securities had climbed to around 4% . So if the federal government could borrow money for 2 or 3% on the capital market, Greece would have to accept 6 or 7% interest in order to get the loan. In mid-February it was also unclear whether Greece would even succeed in raising around 20 billion euros on the capital market in April and May. According to press reports, that much would be required to repay expiring loans. Extrapolated to the total national debt, the risk premium alone would devour around a quarter of the Greek tax revenue. The gap between tax receipts and expenditure would thereby widen again considerably. A spiral would be set in motion in which the national debt and risk premiums would continue to rise. At some point, the lenders would come to the conclusion that even arbitrarily high interest rates are no longer a compensation for the default risk, if only because the probability would be far too small that Greece could raise the money for such high interest rates.

An uncomfortable situation had already arisen in February. Uncomfortable for Greece. Uncomfortable for the other eurozone countries such as Portugal, Spain, Ireland and Italy. They feared that the investor confidence crisis could spill over into these countries. Uncomfortable for the still relatively solvent members of the Eurozone, such as France or Germany. They were quickly assigned the role of problem solvers and renovators. Finally, uncomfortable for the world financial markets as a whole and for the world, because severe distortions on the capital and credit markets in the euro zone would probably not remain without effects on the world capital markets and ultimately threaten the entire financial system.

The currency markets reacted nervously in February. All market participants were uncertain about the further development. Would there be a default in Greece? Would that trigger a financial crisis? Would there also be a loss of confidence in Italy, Portugal or Spain? Would the risk premiums also increase there into the area of ​​what can no longer be financed and thus bring about the actual crisis? Or would the ECB deviate from its iron principles and, for example, loosen the conditions for lending on Greek government bonds? Would the euro go "soft" one way or another? Would individual EU states give Greece financial aid or guarantees? Would the European Commission come up with something? Would she take the International Monetary Fund on board or commission it? What consequences would the events have for the institutional reforms of the euro area? How would the markets behave? Would a new gaming table be opened in casino capitalism? Would single big players bet on certain events? Would the failed large institutes then have to be rescued by the state? Would that mean that the trust among financial market participants would be destroyed?

The EU heads of government met on February 11, 2010 in Brussels for a special summit. Several messages can be found in the reports on the summit. First: in the event of an extreme emergency, Greece will be helped. Second, hopefully it doesn't come to that. And thirdly: who will tell us how we can help Greece without violating the EU treaty? It sounds a bit like Merkel's assurance from the days after the Lehman bankruptcy that the deposits at German banks will be guaranteed. Behind this was probably the hope that the markets would understand the vague promise as a kind of default guarantee and that Greece would become creditworthy again. Perhaps one thought that concrete procedures and institutions that would be used in the worst-case scenario could be negotiated another time. Best in times of non-crisis. And then put the matter on record because of the lack of urgency. Unfortunately, the situation worsened in the weeks after the summit.

You have to ask yourself various questions in the face of the dilemma. Turning backwards, the question arises: How and why did this crisis come about? It's not about pointing to Greece. Greece is definitely not an orphan. But good systems also bring black sheep to reason. The question is: what is the weaving error of the Maastricht Treaty? Looking ahead, the question arises: What are the short-term and long-term answers? What are their effects? And what are the side effects? Which answers are better than others? And which are more likely than others, given how politics work?

The Maastricht Treaty weaving flaw

The Maastricht Treaty was supposed to solve a difficult problem that arises when different sovereign states share a currency and a central bank. The problem manifests itself in two questions. On the one hand: How do you prevent individual countries in the eurozone from accumulating high national debts? Such mountains of debt can undermine the credibility of a policy of the European Central Bank aimed at price stability. And if several members of the euro zone were to accumulate high national debts, would they not then use their political weight and their votes in the decision-making bodies of the ECB to reduce the burden of debt and interest rates through higher rates of price increases? The second question is related to the first. What would happen in the extreme case if a state has accumulated so much debt that it can no longer save itself from the debt trap? If such a state were in control of its national currency, it could start printing money or, in extreme cases, eliminate debts through currency reform. Individual countries within the euro zone do not have this option. You could try to leave the eurozone and reintroduce your own currency. But this option is not actually provided for in the treaties, nor is it very tempting.

Critics of the monetary union would have replied their fathers and inventors to such questions with confidence: “Dear friend, first of all, horror scenarios are far from reality. Second, there will never be such a situation. We were far too smart for that. Of course we have built in two safeguards against the impossible. The first safeguard is the no-bailout clause (now Article 125 of the Lisbon Treaty). Debt maker candidates get no help from other EU countries. And that's why no one will run into such high debts. Because if you don't get help, you just watch out that you don't get into trouble. And if someone tries anyway, we knock them on the finger right from the start. That's why we have the regulatory body of Art. 126: long before the situation becomes critical, an excessive deficit procedure is initiated against a debtor. And incorrigible debtors, yes they face severe financial penalties. "

In fact, the sanction mechanism of Article 126 TFEU (ex Article 104 TEC) never really worked. Its first real test - of all things against Germany - did not lead to its consistent application. But for its revision and reinterpretation. The dramatic situation in Spain, Portugal, Italy and, above all, Greece in the spring of 2010 could not be prevented by “knocking on the finger in good time”.

When the impossible has happened

Today we are where we supposedly could never get to because of the cleverness of the Euro fathers. Article 125 of the TFEU tells us what should not happen in this situation: there must be no financial aid. Unfortunately, the article does not say what should happen instead when a euro state has put its public finances in a hopeless position. If the creditors no longer trust a heavily indebted euro state and refuse to give it follow-up credit for its high debts, what then? The Euro Fathers were so sure that it would never get to the point that it was too good time for them to think about this question.

The impending payment defaults of hundreds of billions of euros could shake the financial sector even more than the bankruptcy of Lehman Brothers did. If one believes the statements made by politicians from this time, one could not expect the markets to default on payments in the event of a possible bankruptcy of Hypo Real Estate. The credit volume was much smaller than it is for Greece, Portugal or Italy. If one of these countries defaults, there could be mistrust between the financial institutions if nobody knows how many of the possibly “toxic” bonds of the country in question a potential business partner has in the vault. Financial companies that have sold credit default insurance for such sovereign debt are quickly on the verge of bankruptcy, similar to the US insurer AIG at the time. Such companies are no less systemic in 2010 than they were in 2008.

Back then, in autumn 2008, state leaders and finance ministers allegedly prevented the meltdown of the financial markets with generous transfers and state guarantees for financial companies and with verbal promises of such guarantees for private investors. If the states themselves are the shaky candidates, who will prevent the sell-off of government bonds and the collapse of this market with their guarantees and promises?

Wrong expectations with dangerous consequences

European politicians, including members of the EU Commission and the European Central Bank, are now urging Greece to adopt strict austerity measures. And the Greek government once again promises to close the gap between tax revenue and government spending and to put the budget in order. The reactions of the Greek people and their interest groups to very moderate government proposals in this direction are not very encouraging.

But why should the Greeks save too? Isn't it much better to carry on as before? It lives fine with EU subsidies and a state budget that is largely financed from new debts. The interest burden on this budget has been unusually moderate over the past ten years, mainly because Greece no longer had to pay interest in drachmas but has fought its way into the euro zone, where the ECB has credibly ensured price stability. With the entry into the euro zone, the interest burden has therefore decreased by many percentage points. This deteriorated again for Greece in spring 2010, when the risk premium for Greek bonds was in some cases over four percentage points higher than that for German bonds. Was the market (and perhaps also Greece itself) a little uncertain until February 2010, how seriously the no-bailout clause in the Maastricht Treaty was meant: by February 2010 at the latest it has been clear: the ban on financial aid is at best a legal obstacle to that when in doubt, you will get around one way or another if you will. And you want.

The situation is fatally reminiscent of the formulations with which the Federal Constitutional Court in Germany established the existence of a debt liability association between the federal government and the states. The Constitutional Court last spoke in its judgment on the budgetary emergency of Berlin in 2006 that a federal state must first exhaust all possibilities to help itself, but that the federal-state community is obliged to help as a "last resort" if all these Funds are exhausted. Originally, the Federal Constitutional Court had established this auxiliary requirement and with it the liability community when it provided Bremen and the Saarland with help to overcome the extreme budgetary emergency of these countries. The development of the federal-state finances gives us a possible look at the future of Europe: The federal government began making payments to Bremen and Saarland in 1994. These payments only lasted five years. Then they were extended for another five years. At the end of all these payments, Bremen and Saarland explained how useful this aid was, but that they were ultimately still in a budgetary emergency and still needed money. They went to the Constitutional Court again. In the constitutional amendment of 2009 within the framework of Federalism Commission II, they received special transitional aid up to 2019 in the amount of 240 and 300 million euros annually, and thus more than any other federal state. We can now probably look forward to similar developments at European level.

It is said that criticizing is easy. But how could you do better in the current situation?

A guarantee umbrella!

The European Union could put a guarantee umbrella over the debts of the Greek state. It should look like this: Greece remains obliged to pay interest and repay the guaranteed debts. The EU should only step in in the event of suspension of payments. The guarantee umbrella should relate in particular to the issue of debt instruments that are used to finance the old debts. In an adjustment phase, the EU should also guarantee the Greek state a limited quota of net new debt desired or approved by the EU, provided that this corresponds to a sensible consolidation concept. This quota should then also be covered by the guarantee. Guarantees should expressly not relate to net new indebtedness that does not belong to this desired and approved part of the new indebtedness.

As long as the guarantee umbrella exists, Greece has two types of debts: debts that are guaranteed by the EU and those that are not. In compensation for the guarantee umbrella, Greece should undertake to give priority to its interest and repayment obligations for the guaranteed debts. Net new debt not approved by the EU would then not be guaranteed and the claims of the creditors for these debt instruments would also be subordinate to the guaranteed portion of the debt. Because of their subordination and the lack of EU guarantees, these non-guaranteed debt instruments are also at risk of real default.

In addition, Greece should be given an incentive to end the situation with the guarantee umbrella. Greece could be made to pay a fee for this, e.g. in the amount of one percentage point of the amount under the guarantee.

What are the consequences of the guarantee umbrella?

First, Greece could finance its expiring loans with new loans on the best terms on the capital market. The credit rating of Greece for bonds that serve to manage the follow-up financing of the old loans would be as good as the credit rating of the EU as a whole. The high risk premiums that Greece currently has to pay to refinance its expiring loans would be off the table. In relation to the total credit volume, this would relieve Greece of more than 10 billion euros per year if the risk premium was demanded by the markets in phases. This relief is important because it gives Greece a real chance to rehabilitate its public budgets on its own. Granted, Greece would have to pay a small amount to the EU treasury as compensation for the guarantee umbrella and as an incentive to get out of this situation.

Second, Greece would be forced by the markets to reorganize its public finances. Greece would have to follow the consolidation path set by the EU and the guarantee umbrella.It is to be expected that Greece will either not be able to take on the part of the net new debt that is not under the guarantee umbrella, or at extremely unfavorable terms, because these loans will be serviced subordinate to the guaranteed debts. And markets are much more ruthless than the governments of the other euro countries when it comes to refusing to help. For this form of rationing, the subordination of net new debt to guaranteed debt is of particular importance. If this net new debt were not subordinate to the debts under the guarantee umbrella, the guarantee umbrella would simply open the money locks on the capital markets for the Greeks for further indebtedness for many years and the EU would ultimately have to redeem the guarantees and pay the Greek debts.

Third, the systemic risk would be averted. The entire volume of the currently existing debt (and its follow-up financing) is under the guarantee umbrella. Anyone who has how many Greek government bonds in their vaults then no longer plays a role in the trust among financial market players. The impending insolvency of Greece can be practically the same as private lenders. Speculative attacks and bets on Greece's insolvency also become uninteresting. The market players would also like to finance the follow-up financing of Greece's expiring old debts and on favorable terms, because this part of the new loans would be EU-guaranteed.

Fourth, the capital market would critically assess loans that exceed the guaranteed volume (i.e. the part of the new debt that does not come under the guarantee umbrella) and price them appropriately according to the country risk. Market participants know that this part of the loan will only be serviced if Greece has money left after it has paid all of the interest on the debts under the guarantee umbrella. The risk premiums on this part of further loans will be very high, if buyers for such secondary loans can be found at all. The loan volume that is not under the guarantee is therefore likely to be small. The real possibility of default on these loans is also not associated with a systemic risk. This also makes a no-bailout for this unwanted additional new debt credible.

This problem solution is also in the interests of all parties involved, at least in comparison to a disorderly state bankruptcy in Greece. Greece is gaining financial leeway through favorable refinancing conditions on the existing debts. Greek politics comes up against external limits, determined by the credit market, when it comes to new borrowing, and this helps it to convey the need for restructuring to its own population. The other euro countries also benefit. The other bankruptcy candidates in the euro zone escape a domino effect that the bankruptcy of Greece could trigger. The richer euro states save themselves restructuring aid. The EU generates additional income from the fees for the guarantee fund.

Two warnings

Two warnings at the end: First, whether such a solution is feasible depends on whether this guarantee umbrella is compatible with EU law, in particular with the prohibition of auxiliary in Article 125 TFEU (ex Article 103 EC Treaty). Second, the proposal is designed for a one-off bailout and could arguably overcome the current crisis cheaply. At least in this form, it is unsuitable for becoming a permanent instrument of budget consolidation in individual EU countries. The expectation of the markets that the EU will open a bailout in case of doubt would in the medium term trigger similar negative behavioral incentives and expectations among those involved as other proposals, which ultimately all represent a general bailout guarantee. In the medium term, therefore, one must think about an appropriate reform of the European financial constitution.

Ways to deal with the debt crisis in Greece and other EU member states

Max Otte

After the critical phase of the financial crisis appeared to be over, the threatened bankruptcy of Greece appears to take the European Union and the world community as a surprise. This shouldn't have been the case. As early as 2004 it became known that the data on the Greek government deficit from 1997 to 2000 were unclear or incorrect and that Greece had wrongly become a member of the euro zone.1 For years there have been economic imbalances between Spain, Greece, Portugal, Italy and Ireland and the Rest of the European Union. In its monthly report from February 2007, the European Central Bank warned of growing imbalances in the euro area and advised that the economic and financial policy risks from the current account deficits of some euro countries should be considered and that the good economic situation should be used to consolidate national budgets to drive forward 2

In addition, it is absolutely incomprehensible that the European Union had not developed any contingency plans in the event of a threatened insolvency of a member state. State insolvency is a regular phenomenon. For example, since the first wave of sovereign defaults in the 1820s, Latin American debt crises have occurred with alarming regularity every 50 years: in the 1870s, 1930s, and 1980s. In their book "This Time is Different", published in 2009, Kenneth Rogoff and Carmen Reinhard present a detailed and quantitatively stored history of the financial crises. Since the year 1800 countries, which represent an average of 2 to 10% of the world gross national product, have been in default or bankruptcy. In the years around 1814, 1840, 1850 the value reached around 15%, in 1945 even almost 45%. Even in the 1980s, the proportion of countries that could not pay their debts was relatively high at around 10%. From 1989 the proportion then steadily decreased to almost zero in 2004. However, this was an exceptional situation that otherwise only occurred twice, namely between 1891 and 1931 and around 1821.

The threatened bankruptcy of Greece is by no means an event without precedents; on the contrary: there is a wealth of historical experience that can help us deal with it.

The birth defect of the European Monetary Union

The economy is highly political, and so are the monetary and debt policies of states. All states have an interest in stable currencies and exchange rates, but creditors and debtor countries have different interests and perspectives that require political mediation. This became clear at many points in the history of monetary policy: in the negotiations on the Bretton Woods system in 1944, in which the USA appeared as the creditor and England as the debtor, in the unilateral termination of the Bretton Woods system by US President Richard Nixon in the summer of 1971 ("Nixon shock"), in the negotiations for the establishment of the European Monetary System by Helmut Schmidt and Valery Giscard d'Estaing 1978 to 1979, the negotiations on aid for the Latin American debtor countries after 1982 and in the establishment of the European Economic Union , which was introduced by the Single European Act of 1987 and the Delors Report of April 1989 and concluded by the Treaty on European Union (Maastricht Treaty) of December 1991.

Nevertheless, this conflict of interest has been largely suppressed by both the more politically and more mathematically oriented economists in Germany. The economic and monetary union was based on a political compromise between Helmut Kohl, or Germany (and implicitly the countries of the D-Mark bloc: Austria, the Netherlands, Belgium, Luxembourg) and Francois Mitterrand, or France (as well as the southern countries) . The latter agreed to German reunification, provided that German economic potential was integrated into the European EU and made available to all EU countries.3 The Germans, for their part, consoled themselves with the fact that strict convergence criteria had been negotiated for admission to the European Monetary Union and have been contractually stipulated that the European Central Bank, like the Bundesbank before, should be independent of instructions and committed to monetary stability and that the states would not be responsible for their debts according to Article 125 TFEU (Treaty on the Functioning of the European Union) (no -bailout-clause) .4 One consoled oneself with the fact that the upper limit for new indebtedness of 3%, the total debt limit of 60% as well as the limits for interest rates and inflation are sufficient to achieve a stabilization and convergence of economic policies.

Foundation stone or coronation theory?

With this, the advocates of the foundation stone theory prevailed in the public debate in Germany, who saw the monetary union as an important impetus for further integration. The warnings of the proponents of the coronation theory, who demanded that economic policy must first be harmonized before one could venture into an economic and monetary union, went unheeded. As early as 1997, professors Wilhelm Hankel, Wilhelm Nölling, Joachim Starbatty and Karl Albrecht Schachtschneider filed a complaint with the Federal Constitutional Court against the Treaty of Amsterdam introducing the euro, but it was rejected.5 The former chief economist of the Bundesbank, Otmar Issing, also advocated the coronation theory. And in a discussion paper from 1998 I wrote that “at present the monetary union is an economically bad step” and that sooner or later the monetary union will get into serious difficulties. I also described the institutions of the EU as not democratically legitimized and noted: "The monetary union already has the seeds of its own destruction in it and will ultimately lead to the collapse of the house of cards that we know as the Europe of Brussels." 6

I did not see the failure of the euro, which was already emerging in 1998, as a failure of the European idea, but as an opportunity for Europe to legitimize itself democratically

Why was the introduction of the euro in 1999 a bad economic and monetary policy? The argumentation follows the “coronation theory” as well as the theory of optimal currency areas developed by Robert Mundell.8 According to Mundell, the factors of production (labor, capital and goods) must be mobile within the currency area in a currency union in order to compensate for any differences in economic development. This is necessary because there are no flexible exchange rates to cushion any inequalities in development. If, for example, a boom arises in Spain, which would drive up prices and wages there due to higher demand and lower the region's foreign trade balance due to higher demand for imports, then in a mobile world, workers and companies would as well not only goods flow into this region. This higher supply would have a dampening effect on demand.

What had to come came. In view of the lack of economic policy coordination between the member states, the economies developed very differently between the beginning of the European Monetary Union in 1999 and 2006. The solidity of the Federal Republic of Germany and some other states guaranteed uniformly low interest rates within the monetary union. This acted like a stimulant, especially for the traditionally rather unsound economies of southern European countries and Ireland, which promoted a massive, albeit largely artificial, boom, especially in the construction industry. During this period, prices rose by 10% compared to the euro area average, in Spain by 9 and in Ireland by as much as 14%, while they fell by 4 in Germany and Finland and by 3% in Austria. At the same time, unit labor costs and competitiveness developed in the individual countries.

The domestic economy, which was artificially heated up by the single currency area, also meant that the cumulative current account deficits in Portugal between 1999 and 2006 amounted to almost 60% of the gross domestic product, in Greece to 50% and in Spain to 30%. The EU Commission remained inactive, however, as the convergence criteria were largely complied with due to the global low interest rate environment. (Ironically, Germany and France also violated the debt criteria due to the recession in 2002). There is no convergence criterion for the current account balances (which statistically do not even exist in a monetary union).

The crisis in Greece (and in the PIIGS)

With more than 120% debt of the gross domestic product, Greece is the front runner in the European Union. This alone does not have to lead to bankruptcy: in the last ten years the debt level in Japan fluctuated around 150% of the gross domestic product before it climbed to the current almost 200%. It depends on the efficiency of the corresponding national economy. In the meantime, however, Japan is also facing the crisis. 9

In the case of Greece, there is no question that the country has managed beyond its means - a fact that only emerged openly through the financial crisis, but which a vigilant EU Commission could have noticed earlier. The current budget deficit is almost 13% of GDP (Spain, Ireland and the EU country Great Britain with its own currency and the non-EU country USA are also over 10%). The public sector in Greece is bloated - out of 11 million Greeks, one million depend on the state. The pension rules are extremely generous. The unemployment rate is 10.6%. Between 2004 and 2008, transfers from Brussels amounted to around 5% of Greek economic output. Corruption and bribery are omnipresent, a family has to spend an average of around 1,600 euros a year on “fakelaki”, bribes

After the banking crisis was averted in 2008 by liquidity and equity aid from the states amounting to more than 5 trillion dollars - the global banking system still has negative equity, is therefore de facto insolvent - the next weak point in the overly credit-financed world economy is now the target of speculative " Attacks “.11 For example, with the help of credit default swaps, derivatives in which large sums can be moved with small stakes, there is speculation that Greece will go bankrupt. Credit default swaps also played an ominous role in the subprime crisis. 12

It should not be overlooked that such “attacks” mostly have a real background, as was the case with the 2008 banking crisis and George Soros' forced withdrawal of the British pound from the European monetary system in 1992. Greece is unsound, corrupt and over its own Conditions managed. Even with a radical austerity course, the current deficits will initially remain very high - perhaps 7 to 9% of GDP and the debt burden will continue to rise accordingly. The fact that the Greek state, at 6.5%, has to pay more than twice as high interest as the Federal Republic of Germany for bonds, reflects the real differences in the solidity of the two countries.

The Greek economy accounts for only 2.7% of the EU's economic output (together with Portugal, Spain and Ireland 17.9%), but like the banking crisis, it is also about domino effects: after Greece, other problem countries could become insolvent. The German banks are committed to the PIIGS countries with 522 billion euros (thereof 31.8 billion euros in Greece), which is claims amounting to 20% of the German gross domestic product. Should some of these claims fail, a number of German banks are facing bankruptcy again and would have to be rescued again. The world economy would then probably be on the verge of collapse, similar to the fall of 2008. After subprime, “sovereign debt” is the next hot spot that relentlessly exposes the weakness of the overly credit-financed world economy. Greece will therefore be rescued from its self-inflicted misery and will not - which would be correct - have to declare national bankruptcy.

Ways out of the crisis

In principle, a sovereign state can get rid of its debts in four ways:

  1. due to inflation (but only if the debt was borrowed in your own currency),
  2. through bankruptcy and / or debt rescheduling (settlement),
  3. through innovation and growth and
  4. through economic reforms and an austerity course (less government spending and more income).


Neither of these options is without risks and side effects.

Ways of reducing national debt

Source: Adapted from: Worst-case debt scenario - protecting yourself against economic collapse, Société Générale, Special Report, 4th quarter 2009.

  • Inflation: The debtor countries of the EU as well as other countries with low savings rates like the USA would prefer to discharge their obligations through inflation. Even the chief economist of the International Monetary Fund is now openly considering the option of allowing inflation to rise to 4%, for example.13 However, this path is precisely denied to Greece by the monetary union - unless it succeeds in transforming the monetary union from a monetary stability community into one Redefine the inflation community.
  • Innovation and growth can theoretically lead out of the crisis: Falling unemployment relieves the state budget, economic growth increases the tax base. Often, however, they hide sham innovations at the expense of future development or an increase in risk, such as with the US real estate bubble and probably also the upswing of the PIIGS countries since the beginning of the European Monetary Union.
  • Bankruptcy or debt rescheduling: A complete national bankruptcy is rare. Most of the time, a country will stop paying on the debt and then negotiate with the creditors. For example, in 1998 Russia suspended domestic debt servicing on its government bonds, but continued to service external debt.
  • Economic reforms can help by reducing government spending and increasing the tax base, possibly with the help of privatization. But here too, dummy bubbles can arise, for example in the ailing English economy after the Thatcher and Blair reforms.

The international community will probably agree to a mixture of financial aid for Greece and calls for economic reforms in Greece. Reforms are relatively easy to control: government spending and tax policy must be monitored. The demands of the EU that have now become known are tough: new indebtedness is to be reduced from the current 13% of GDP to 3% by the end of 2012.14 There has been experience with similar programs - albeit outside the EU - for several decades at the International Monetary Fund, who calls for and monitors reforms in exchange for financial aid in the event of external debt crises. This process is known as "IMF Conditionality ".15

Institutions and actors

In the case of Greece, there are basically three groups of actors that could offer such an aid program: the International Monetary Fund, the European Union or individual countries or groups of individual countries. There is much to be said for the International Monetary Fund. Then the European heads of government would not have to expose themselves either to the European Union or to their own countries and the famous Article 125 of the Treaty on the Functioning of the European Union, which forbids the Union or individual EU member states to answer each other for their debts, would be complied with. 16

Unfortunately, German politicians in particular, above all Finance Minister Wolfgang Schäuble, exposed themselves early on to the fact that Greece was a task for the EU. There is a danger here that political prestige thinking will lead to disadvantages for Germany, which would have to bear the main burden.17 In addition, the AEU Treaty would definitely have to be broken, even if a reason can be found why this is not the case or why this is necessary . Currently, however, there seems to be a rethinking. In view of the meeting with the Greek Prime Minister Papandreou, Angela Merkel stated that it was not about aid for Greece

Instruments

In addition to direct loans from donor countries or institutions, a Greek loan that would be guaranteed by individual institutions would also be conceivable. In addition, Greece could theoretically call up substantial funds from the European structural fund for individual infrastructure projects to which the country is still entitled. For this, however, projects in Greece worthy of funding and a largely functioning and corruption-free economy would be necessary. This is not the case, which is precisely the reason why the funds cannot be called up.

Ultimately, a solution will be found that will impose substantial austerity efforts on Greece, but at the same time involve new loans for the country. This creates new liquidity. So there will be “a little inflation” and a “little saving”. If this were to happen within the framework of the EU or its member states, the old economic and monetary union would be clinically dead. We are already talking about an “economic and monetary union 2.0”.

Foreign policy imbalances

Foreign policy imbalances always have two sides: while prices and wages rose sharply in the southern countries after the introduction of economic and monetary union, in the Federal Republic of Germany, whose economic output accounts for 27% of the GDP of the euro countries, wage restraint was so pronounced that Heiner Flassbeck speaks of “German wage dumping.” 19 Now, a German savings rate of a good 10% cannot really be described as high - in China it is over 30% and in Germany it also reached 30% in the 1960s - but given the extremely low level It leads to imbalances in savings rates in many other countries. The German export surpluses to the euro area are rising steadily and account for 55% of the export volume in trade with Greece, for example. So it is not surprising that the southern countries are making massive accusations and demands against Germany to increase domestic demand

At the same time there are protests in Greece against the drastic austerity measures that Prime Minister Papandreou is forced to take. Trade unions and other political groups are forming up to resist - and one cannot blame them for fighting austerity measures, which are imposed on them by a democratically inadequately legitimized EU Commission, sometimes with drastic arguments.21 This is not only the case an economic crisis but also a major political crisis, as I predicted in 1998

Further solutions

Economic and monetary union turned out to be a colossal economic and political mistake, but in the course of German reunification it was a necessary foreign policy compromise. The mantra-like assertion that monetary union promotes economic integration has finally been discredited. Perhaps the conversion to a single currency has resulted in cost advantages in some areas of the economy. However, the proponents of the economic union did not take into account the economic costs of the abolition of exchange rates: in view of the very different economies, fixed but adaptable exchange rates such as in the European monetary system or the Bretton Woods system could have provided an important information function about the state of individual economies until 1971.

It would be desirable if, as a result of this serious crisis, the status quo ante of the European Monetary System with national currencies and fixed but adjustable exchange rates were restored. Wolfgang Gerke, for example, calls for Greece to be excluded from the economic and monetary union.23 This would by no means be the catastrophe it is often portrayed as: on the contrary, the EU community of states could better and more flexibly help a country in Greece with adjustable or floating exchange rates so that another economic policy instrument or valve is available. Greece must be able to determine its own economic course. Theoretically, it would also be possible to split Europe into two currency blocks.

At the same time, a “coalition of the willing” led by France and Germany would have to push ahead with the re-regulation of the financial markets, which has so far been very hesitant. The use of financial derivatives, which US superinvestor Warren Buffett described as “financial weapons of mass destruction” back in 2003, continues almost unreservedly. Credit default swaps were widely used to speculate against the Greek state. With the help of such financial derivatives, Greece has even been able to hide its debt level in recent years. Mind you, financial derivatives are not causing the problems, but they are making them unnecessarily worse. It would also be particularly important for some of the core European countries to come to an agreement on increasing the capital ratios for large banks. In a global context, this will hardly be possible, but Germany, France, Austria, some Nordic countries and perhaps also Switzerland could be pioneers in this respect against the resistance from Great Britain, which is expected to be certain. Equity is the safety buffer of the market economy, sufficient equity ratios increase the risk of speculation for the actors in the capital markets and create a cushion of risk if individual actors get into difficulties

All of this would increase the options of the European states and in no way mean an end to European integration. On the contrary, it would draw the attention of politics from technical and economic policy to the really important question: the draft of a European constitution worthy of the name.

  • 1 Werner Mussler: Serious errors in the Greek statistics, in: Frankfurter Allgemeine Zeitung, January 12, 2010, online at: http://www.faz.net/s/Rub3ADB8A210E754E748F42960CC7349BDF/Doc~E36DFBBC8713A40279EDB3730376BE962~ATpl~Ecommon
  • 2 European Central Bank: Monthly Report February 2007, Frankfurt am Main 2007.
  • 3 Max Otte: A Rising Middle Power? German Foreign Policy in Transformation, New York 2000, p. 126 ff.
  • 4 http://dejure.org/gesetze/AEU/125.html.
  • 5 Wilhelm Hankel, Wilhelm Nölling, Karl A. Schachtschneider: The Euro lawsuit. Why the monetary union must fail, Frankfurt 1998.
  • 6 Max Otte: The Euro and the Future of the European Union - A lecture prepared for the Department of International Relations, Boston University and the Dynamics of Organization Program, University of Pennsylvania, New York, American Council on Germany Occassional Paper 1998 / # 5 , P. 3.
  • 7 Ibid, pp. 3, 21-23.
  • 8 R. A. Mundell: A Theory of Optimum Currency Areas, in: American Economic Review, 51, 1961, pp. 657-665.
  • 9 Vitaliy N. Katsenelson: Japan - Past the Point of No Return? Investment Management Associates, Denver 2010.
  • 10 “The Greek bankruptcy”, in: Focus 8/2001, pp. 120-136.
  • 11 “Hedge funds are forming against Europe”, in: Frankfurter Allgemeine Zeitung of February 27, 2010.
  • 12 “Playing with the highest risk”, in: Der Spiegel 8/2010, pp. 64-68.
  • 13 “Consequential Flirt”, in: Der Spiegel 8/2010, p. 76. “IMF chief economist is thinking about higher inflation”, in: Frankfurter Allgemeine Zeitung, February 17, 2010.
  • 14 “Papandreou forces the Greeks to make drastic cuts”, in: Handelsblatt, 3.3.2010, online at http://www.handelsblatt.com/politik/international/weiteres-millionen-sparprogramm-papandreou-zwingt-griechen-drastische-einschnitte- on; 2539703.
  • 15 http://www.imf.org/external/np/exr/facts/conditio.htm.
  • 16 http://dejure.org/gesetze/AEU/125.html.
  • 17 “EU promises a solution to the debt crisis”, in: Handelsblatt, February 8, 2010, in particular pp. 1, 8-10, 16, 36, 42.
  • 18 “Merkel does not want to offer the Greeks any help”, in: Die Welt, 3.3.2010, http://www.welt.de/politik/deutschland/article6635478/Merkel-will-den-Griechen-keine-Hilfe-anbieten. html.
  • 19 Arvid Kaiser, Kai Lange: German wage dumping bursts the monetary union, in: manager magazin, February 19, 2010, online at: http://www.manager-magazin.de/unternehmen/artikel/0,2828,678880,00.html .
  • 20 Rainer Hank, Winand von Petersdorff: The Germans are being tormented, in: Frankfurter Allgemeine Sonntagszeitung of February 28, 2010, p. 35.
  • 21 Michael Martens: Greece black in black, in: Frankfurter Allgemeine Zeitung of February 24, 2010, p. 6.
  • 22 "The Euro an the Future of the European Union", loc. Cit. P. 3, 21-23.
  • 23 "Throwing out - or saving?", In: Die Zeit from February 18, 2010, p. 24.
  • 24 Max Otte: Germany's Financial Center versus the German Banking System - Two Political-Economic Perspectives for the Future, in: Frank Keuper, Dieter Puchta (Ed.): Germany 20 Years After the Fall of the Wall - Review and Outlook, Wiesbaden 2010, pp. 179-205, here P. 196 ff.

Lessons from the Greek crisis - Europe needs more governance

Ansgar Belke

In the third year of the crisis, it is becoming increasingly clear that a number of countries in the euro zone are financially on the brink. The financial markets have developed a new name for this: the "PIGS". These include after the initials Portugal, Ireland, Italy, Greece and Spain. This also includes the alleged European hardship cases. However, the term “PIGS” is sometimes misleading, as it only refers to fiscal policy. When determining the sustainability of national debt, one should look not only, and perhaps not even primarily, at current budget data, but at the resource balance for the entire economy.

It is one thing to provide funding to countries like Ireland and Spain that are generating robust internal cash flows and have run into trouble only because of excessive investment. But it is of a completely different dimension to financially support a country whose wealth has eroded, since the internal cash flow is not even sufficient to maintain the capital stock. This concerns the cases of Greece and Portugal. 1

Will there be a covert or overt bailout by EU member states?

According to the European treaties, governments are solely responsible for their budgetary policy. The Greeks have to deal with their problem themselves according to current law. If they fail to do this, the risk of a systemic crisis increases, which could spill over to Portugal or Spain within a year.

Within the EU, no aid procedure has (so far) been established or accepted. Because if governments could count on other countries to come to their aid with unsound fiscal behavior, the pressure on fiscal discipline would ease. This is why the Stability and Growth Pact with the “no bailout” clause was introduced at the start of EMU. If the EU is generous with Greece, the austerity efforts of other countries would also be thwarted. Ultimately, the future of Economic and Monetary Union will be crucially influenced by how the precedent Greece is dealt with. Every state with debt problems will in future demand the same aid that was granted to Greece.

Financial aid to Greece violates the EC Treaty (now Treaty on the Functioning of the European Union - TFEU), which aims to ensure sound budgetary policies in the Member States. In the opinion of German legal experts, not only is any form of financing of the Greek budget by the ECB and the national central banks excluded. Also, a member state may not be liable for or stand up for the liabilities of the central government of another member state. There is consequently no legal basis for aid from other EU countries. Germany is also bound by this. This means that considerations that individual countries such as Germany or France could provide bilateral loans are actually superfluous - as is the more frequent suggestion that public banks such as the Reconstruction Loan Corporation (KfW) could buy Greek government bonds.

What happens in the worst case? We are not at the point of bankruptcy yet, because Greece still has access to the capital markets. Greece is currently not a case for the International Monetary Fund (IMF) either, as the country can still place its government bonds. This access will remain open when the Greeks finally pursue a solid budget policy along the lines of the drastic austerity program presented at the beginning of March. The recent measures taken have significantly increased Greece's credibility. Markets are now starting to believe again that Greece's default is less likely and that a bailout on more sustainable public finances could be obsolete. Greece's short-term liquidity problem will remain virulent and critical over the next few months.

That is why European monetary policy should not be called upon to buy the bonds of financially unsound EMU member states. This would be absolutely counterproductive - similar to the issuance of joint euro bonds in the euro zone, through which Greece could borrow at lower interest rates. This is because this undermines the disciplining function of the capital market, which is currently demanding high risk premiums on new Greek public debt and providing the necessary pressure to reform.

Greece can of course leave EMU.However, this is unlikely, among other things, since many of its liabilities are denominated in euros and a massive devaluation of the Greek currency should be expected in the event of the exit. This would increase the debt burden of the Greeks even more, especially since the interest burden on national debt would also increase considerably, since the Greeks would then no longer be able to benefit from the lower euro interest rate. A systematic bailout of problem cases would also not be an option, because ultimately the EMU would not be able to cope with such a change of direction and would be jeopardized by its existence. Ultimately, the countries that oppose such a strategy, likely Germany, but also the Netherlands, Austria, Finland and a few others, might leave EMU. In the long term, an economic division of the monetary union into a relatively stable northern zone and a heavily indebted southern zone that is dependent on transfers cannot be ruled out. It remains to be seen whether there will also be two different currencies at the end of this development.

In the event of insolvency, a euro country relies on currency partners to start a solidarity campaign. In return for such emergency aid, for which there is currently no example, a crisis state would have to accept strict restructuring requirements. Even before the third and most extensive austerity program presented by the Greek government at the beginning of March, the question arose: What is preventing Greece, for example, from making all state benefits subject to funding conditionality? The government could cut government salaries and subsidies to businesses. The increase in the retirement age and the reduction in social benefits would also be credible pledges for possible lenders in Greece. In doing so, it must be ensured that the Greek government does not make more promises to the EU, in order to put it in a mild mood, than it can actually enforce against its people. It all boils down to bilateral aid to Greece at the moment. Financially strong countries such as Germany could grant the ailing partner a loan - and this in tandem with France. Both would have reason to do so. Because while the French banks are more involved in Greece, the Germans are in Spain. In order to avoid contagion effects on Spain, Germany is therefore potentially interested in participating in a rescue of Greece.

The details of such an aid operation have never been publicly discussed in Brussels. This behavior corresponds to the growing impression of many Brussels observers that the EU is increasingly moving away from closer federal integration and instead lapsing more and more into a less structured form of intergovernmentalism in which a few large countries jointly decide for the Union. Even the latest announcements about the potential rescue of Greece do not change that.

Ministers responsible had made it clear several times that a country in the euro zone should not have to rely on the help of the now more ambitious IMF in Washington. Because going to the IMF could be seen as an admission that Europe is too weak to help itself. In addition, the eurozone's prospects for greater representation in IMF bodies are diminishing. The EU also has stronger sanctioning mechanisms against financial offenders than the IMF, as it can exclude fiscally undisciplined countries from future inflows of funds from the EU structural funds and from the ECB's open market operations. After all, there are always fears that the US-dominated IMF is particularly generous in terms of conditions for loan recipient countries such as Greece, where US military bases are to be found

Bilateral Aid - What Are the Alternatives?

In addition to bilateral loans, the legal admissibility of which is still being examined, there are also guarantees for Greek bonds and even their purchase by state-affiliated banks subject to strict conditions. Assuming that the purchase of Greek government bonds is then to a certain extent a normal financial transaction and not a direct financial aid from a state, the more solidly financed euro countries should at least not be able to avoid guarantees for Greece. For example, Germany and France could agree that KfW and the French state bank Caisse des Depots buy or guarantee Greek bonds. It is also currently being considered whether the German KfW could use guarantees to induce private financial institutions to buy Greek government bonds. According to news outlets, this is currently being considered as a possibility in the coalition.

Ms. Merkel and the German government have not yet made any explicit statements on this. Up until Papandreou's visit, she was evasive of the possibility of buying a KfW bond (“constructive ambiguity”). No wonder: in view of the elections in NRW in May, a financial transfer to Greece that has already been announced would be political suicide.3 It was clear beforehand that the question of financial aid for Greece would probably not be openly discussed during Papandreou's visit to Germany. Any grant decision at this point would have been a big surprise. As a last option, however, later, temporary bilateral aid for Greece cannot be ruled out. The danger is too great that a prolonged Greek crisis could infect other countries as well. After all, there is also a manifest self-interest in it - after all, German banks have also invested in such countries.

Since this is primarily an acute liquidity problem for Greece, buying Greek bonds for the next rescheduling of more than 22 billion euros cannot be ruled out if the market does not then buy all bonds. As the last austerity program of the Greeks met with broad acceptance in Brussels, the ECB and the IMF, the spreads on Greek bonds have already narrowed in the last few days. Intergovernmental aid is therefore hardly necessary before the end of April or the beginning of May.

In the meantime it remains to be seen whether Greece can successfully refinance itself on the capital market over the long term. Should doubts about the credibility of the consolidation rate increase again in the markets, a turnaround may only be achieved through a temporary provision of liquidity at the planned rescheduling dates. Such financial aid must be combined with sustainable and consistent austerity measures in Greece. This also includes steps to increase competitiveness. Because Greece does not get its debts under control by saving alone. In addition, the low export quota must be increased.

However, Greece's extreme austerity course in itself harbors the risk of an initially strong contractionary impulse, which is particularly painful due to the current recession. However, the cost of debt will decrease quite quickly as risk premiums fall. The prospect of short-term liquidity aid would reassure the Greek population, who otherwise could destroy a quick and lasting gain in credibility for the country through revolts against the austerity program.

Orderly bankruptcy proceedings in the eurozone - not just for Greece?

The EU's crisis policy is overwhelmed by this scenario, as there is no uniform political line. Nobody should be able to rely specifically on help, otherwise problem countries would be offered the incentive to speculate on an aid package from the EU. It is feared that, in the event of a more transparent crisis policy, they would successfully bet on joint and several liability and against a “no bailout” by the EU and inevitably take advantage of aid packages and transfer payments. This strategy is implausible because it cannot be ruled out that Europe will find itself in a position to stand by countries like Greece - even if this is inevitably linked to a whole series of tough conditions. The global financial system is also still too fragile for the international community to be able to drop a larger country without risking a domino effect.

Confronted with such conditionality, it cannot be ruled out that a government will be elected in a country that has advertised with the promise of leaving the monetary union. Without a set of rules for debt crises, the euro zone is also unstable in the long term. Because the Stability Pact, the “constitution” of the European Monetary Union, has long been exposed as a fair-weather construct that urgently needs reinforcement in times of crisis. And you can't always rely on a certain amount of regulation by the market. Countries that clearly exceed the 3% limit are currently still being punished by the capital markets, so that the Stability Pact is economically useful due to its signaling function. One lesson to be learned from the Greek statistical disaster is that all national statistical offices within the euro zone must be made independent of the government and, above all, provided with a sufficient budget.