Greek bailout may just be temporary sticking plaster
A big day then for Greece. After some furious backpedalling from the Germans in recent days, bond and stock markets are now pricing in the announcement of a bailout of Greece at today's European Union summit.
Any hint that the EU — and the Germans in particular — are not prepared to stand behind Greece's debt, either by lending it money directly, or by acting as a buyer of last resort for its bonds, will trigger a renewal of the markets' hostilities against Athens.
Still, is an EU bailout of Greece really the best way to proceed? It is clear that the austerity measures Greece has itself announced have not been enough to convince the world that the country can get on top of its debts — yesterday's strikes hardly give rise to optimism — and that the involvement of a third party is thus necessary to restore order. But that is not to say that it should be the EU that fulfils this role.
You can understand why the EU does not want the International Monetary Fund meddling in the affairs of a member of the
single currency. But a rescue of Greece by fellow euro members will make for a serious conflict of interest. Greece needs to be held to the promises it has made about reducing its debt. If it knows it can rely on members of the eurozone to step in when the going gets tough — and if they step in once, they will have no option but to intervene with more help each time Greece is perceived as backsliding — those pledges become negotiable.
The EU will no doubt extract further assurances from Greece. But what sanctions would be practical if Athens does not keep its side of the bargain? Having caved in once in the face
of the threat to the whole eurozone posed by a Greek default, it would have to do so again.
And if Greece — a small contributor to the eurozone economy, responsible for just 3% of its GDP — is not obliged to accept the notion of moral hazard, nor would larger economies be. Spain, Portugal, Italy — any eurozone economy in fact — would all be entitled to assume that the same support would be afforded to them, should they get themselves into similar trouble.
Better then than to call on the services of body with less invested politically in the affairs of the EU.
Not only does the IMF have long experience of working with indebted economies — the EU, by contrast, has none — but it also stands a much better chance of holding Greece to its commitments.
An EU bailout of Greece today will appease the markets and at least postpone a sovereign debt crisis. But such a rescue could prove to be a temporary sticking plaster that allows a much more damaging wound to develop undetected. In the end, the EU may still have to seek outside help.