IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
After a huge transfer-loan of €110 billion last year, Greece is once again pending on EU-IMF charity in order to avoid default, or at least, to benefit from a smooth default (assuming such a thing exists). Meanwhile, the Greek economy is paralyzed and tensions grow inside Greece as well as in other EU member states.
Greece is obviously a harsh issue for EU officials still unable, one year after the explosion of the Greek bomb, to decide what is the right thing to do. Most of them fear the consequences that a bad decision could have on the whole Eurozone and even, something unthinkable several months ago, on the future of the common currency. The Greek government and its opposition—which, together, share a large responsibility in the present situation—are not helping them much since the Parliament is still balking at applying the austerity measures required by the EU.
But, notwithstanding what each side might think, there is a bill to be paid for and someone will have to do it. Basically, there are three possible groups of people to be charged for that bill– first, the Greek taxpayers, second, the private creditors, that is, private institutions (like banks) and individuals who have purchased chunks of the Greek debt, or, third possibility, EU taxpayers, most of them having already troubles to pay their own sovereign debt. There is also the possibility to rollover the debt, the creditors lending more money to Greece as Greece is paying back some of its outstanding debt. This, however, does not allow us to beg the question: Who, at the end of the day, will pay for the bill.
From a moral point of view, Greek taxpayers must surely contribute. They have been living over their means for too long. True, some Greek citizens can argue that they are victims of some form of crony capitalism, their government colluding with banks to hide the truth from them and from their EU partners. Why should they pay back shareholders from foreign banks that pushed them on this bridge to nowhere? If there is undoubtedly some truth to that argument, it remains that electors can’t disconnect themselves from their government and their contractual arrangements and free themselves of all responsibility that easily. It was their duty to check on their government and if they have elected incompetent or corrupt leaders it is their fault. May be this will teach them a lesson and convince them to abandon “majority democracy” for a democracy respectful of individuals’ rights. But again it would be pure cowardice to this when the bill is presented to them. In that respect, the IMF is surely right when it insists that it will not further extend its support to Greece unless there is a large political consensus in Greece on the necessity to introduce radical changes.
Now, should taxpayers from other EU states be forced to contribute? From a moral point of view the case is much weaker. In a way, to the extent that their own governments contributed to put Greece on that bridge to chaos—if only by buying part of Greek’s sovereign debt—and because they did not properly control their governments, they share some responsibility. But it can also be pointed out that, at least for some of them, EU countries have made real efforts to keep their debt under control and have already paid a large tribute to this end. It would be therefore unfair to require from them further efforts to improve the lot of those who have been behaving carelessly.
As for the private investors their moral case stays somehow in-between. We have good reason to expect them to be better informed than the average EU citizen. They knew what they were doing when lending money to the Greek government or investing their money in Greek private businesses. Morality seems however not to be cherished in the negotiations concerning Greece. After all, we keep being told, there is too much at stake here in order to base the decision on something as removed from reality as moral judgment.
But what is really at stake? According to the EU, IMF and ECB officials, it is the future of the whole Eurozone. The reasoning goes as follows – Greece is part of the euro and therefore everything that concerns Greece could have a negative impact on the other euro-States. A default of Greece would be a signal for creditors to avoid also Portuguese, Spanish or Irish government bonds, which on the other hand means that the interest rates for them will raise and their so far uncomfortable situation will quickly become unsustainable. While the Greek bankruptcy would, by itself not affect as much EU economy, a cumulated debt default of the above mentioned States would be for sure catastrophic for the euro.
In other terms, it is precisely because a Greek default would badly hurt those less responsible for the situation—that is, EU taxpayers outside Greece, and members of the Eurozone—that everyone should contribute to the rescue. In other words, we are served another version of the “too big to fail”: it is not fair to put everyone to contribution, but it is necessary to avoid that much greater harms be incurred.
EU officials are therefore about to vote another €110-120 billion, in order to save Greece and avoid the crash. But this is exactly what they did at nearly the same time last year. The €110 billion accorded to Greece didn’t save the situation, as we had correctly foreseen in this paper. Moreover, the conditions set in exchange of this help were simply not respected by Greece. The austerity plan engaged by the government is largely insufficient to solve durably the debt problem and to stimulate the economy. The Greek Prime minister is still blaming the crisis, the “lack of solid EU governance”, the markets and so on for the “bad fortune” of his country. To keep on fueling his policy is therefore irresponsible and useless. It will not solve the problem. And probably it will tease the creditors and financial markets only for a while, until the next emergency. This is the story of the man cutting its dog’s tail piece by piece, because he is afraid to make him suffer. But what would really help the dog and let him recover is to cut the tail at once.
In our opinion what should guide the choice of our governments at that point are the following two principles:
1. Stop trying to rescue Greece from default. As we wrote many times since the Greek crisis surfaced and as news from Greece confirmed everyday, this will not work. So, at least, if EU taxpayers’ money must be used, let’s use it for cleaning up the situation.
2. Whatever cost has to be paid for that cleaning up should go primarily to Greek taxpayers and private investors.
This would imply non-intervention from the EU and strengthening of the Greek austerity plan by privatizations, budget cuts and freeze of salaries. This would also give a very strong and unambiguous signal to countries following the Greek path, like Portugal, Ireland, Spain or even France and Italy.
To this two principles let us add one lesson: don’t put faith into a democracy that is founded on the idea that a government supported by a majority of citizens has the power to strike all the deals it wishes in the name of all citizens. This lesson is valid not only for Greece but for all EU nations that, unfortunately, favor majority ruling over individual rights.