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A Bailout by Any Other Name As the Bailouts Continue in Europe, So Does the Flouting of Rules
(35 minutes later)
LONDON — Bailouts beget more bailouts. LONDON
That is the cautionary lesson from the latest revamping of Greece’s financial rescue deal, according to some economists. And they warn that unless Europe starts enforcing its own stated rules against bailouts and big budget deficits, governments will never get serious about putting their financial houses in order. BAILOUTS beget more bailouts.
Of course, none of the finance ministers who worked out the new financial terms for Greece in Brussels called it a bailout. But for critics it was precisely that. By reducing interest rates and extending the payback maturities on the €168 billion, or $217 billion, that European governments have lent Greece so far, those loans will now become barely profitable for the countries that made them. That is the cautionary lesson from the latest revamping of Greece’s financial rescue deal, according to some economists. And they warn that unless Europe starts enforcing its own rules against bailouts and big budget deficits, governments will never get serious about putting their financial houses in order.
As such, it is the sixth bailout since the European debt crisis exploded in 2009 — three for Greece and one each for Ireland, Portugal and Spain. And these rescues have occurred despite the fact that the treaty underpinning Europe’s common currency project bars bailouts by forbidding one member country from assuming the debts of another. Of course, none of the finance ministers who worked out the new financial terms for Greece in Brussels called it a bailout. But for critics it was precisely that. By reducing interest rates and extending the payback maturities on the 168 billion euros ($217 billion) that European governments have lent Greece so far, those loans will now become barely profitable for the countries that made them.
But if the majority of euro zone countries did not consistently flout another treaty principle — the one limiting a member government’s debt to 60 percent of gross domestic product — there would not be a euro zone debt crisis in the first place. Greece might be the most glaring violator, but Germany and France are also breaking that rule. It is the sixth bailout since the European debt crisis exploded in 2009 — three for Greece and one each for Ireland, Portugal and Spain. And these rescues have taken place despite the fact that the treaty underpinning Europe’s common currency bars bailouts by forbidding one member country from assuming the debts of another.
Although it buys time for Greece, the latest debt deal has been widely criticized for being overly optimistic in expecting Greece to produce the growth and fiscal discipline needed to bring its debt down from the level of 195 percent of G.D.P. today to below 120 percent after 2020. But if a majority of euro zone countries did not consistently flout another treaty principle — the one limiting a member government’s debt to 60 percent of gross domestic product — there would not be a euro zone debt crisis in the first place. Greece might be the most glaring violator, but Germany and France are also breaking that rule.
Skeptics cite Germany’s demand that Greece impose another round of spending cuts in return for this latest dispensation as further proof that the architects of monetary union have decided that the last best hope for the euro’s survival is to continue subscribing to the principle that punishments and threats from Brussels will keep spendthrift nations from falling into hock. Although it buys time for Greece, the latest debt deal has been widely criticized as being overly optimistic in expecting Greece to produce the growth and fiscal discipline needed to bring its debt down to less than 120 percent of gross domestic product after 2020, from 175 percent today.
But some economists contend that as long as countries in trouble continue to accept that they will get bailed out when they run out of money, there will be scant incentive for them to accede to the demands of the euro zone’s stability and growth pact, which requires countries to keep their debts and deficits at reasonable levels. Skeptics also point to Germany’s demand that Greece impose another round of spending cuts in return for this latest dispensation as further proof that the architects of monetary union have decided that the last, best hope for the euro’s survival is to continue subscribing to the principle that punishments and threats from Brussels will keep spendthrift nations from falling into hock.
“There is an acknowledgment in Brussels and Berlin that the stability pact has not worked because it was not strong enough — so now they have tried to make it tougher by imposing more punishments,” said Charles Wyplosz, an international economist at the Graduate Institute in Geneva who contends that latest Greek debt deal is nothing more than another bailout. “But what they don’t realize is that this will not work as long as local parliaments remain sovereign.” But some economists contend that as long as countries in trouble continue to think that they will be bailed out when they run out of money, there will be scant incentive for them to accede to the demands of the euro zone’s stability and growth pact, which requires countries to keep their debts and deficits at reasonable levels.
In a recent paper, Mr. Wyplosz argues that the only way sovereign states will become fiscally responsible over the long run is when they truly grasp that Brussels will abide by the founding treaty’s prohibition against country’s bailing out one another. “There is an acknowledgment in Brussels and Berlin that the stability pact has not worked because it was not strong enough — so now they have tried to make it tougher by imposing more punishments,” said Charles Wyplosz, an international economist at the Graduate Institute in Geneva who contends that the latest Greek debt deal is nothing more than another bailout. “But what they don’t realize is that this will not work as long as local Parliaments remain sovereign.”
In a recent paper, Mr. Wyplosz argues that the only way sovereign states will become fiscally responsible over the long run is by truly grasping that Brussels will abide by the founding treaty’s prohibition against countries bailing out one another.
He points to the United States as an example.He points to the United States as an example.
With dozens of states that manage their own fiscal affairs, yet operate comfortably within a federal system, the common currency system in the United States has long been seen as a model by those who seek improvements in euro zone policy.With dozens of states that manage their own fiscal affairs, yet operate comfortably within a federal system, the common currency system in the United States has long been seen as a model by those who seek improvements in euro zone policy.
At the root of this success, say proponents of the U.S. model, is the fact that despite there being no law or constitutional provision against the federal government’s bailing out bankrupt states, in the past 150 years there has not been a single case in which Washington has had to rescue a penniless state. At the root of this success, say proponents of the United States model, is the fact that Washington has not had to rescue a penniless state in the last 150 years despite no law or constitutional provision against a federal bailout.
And the last time a state went belly up was in 1933, when Arkansas stopped paying investors who held its highway bonds. The last time a state went bankrupt was in 1933, when Arkansas stopped paying investors who held its highway bonds.
To be sure, as the economist C. Randall Henning, an expert on the topic, has described in detail, in the early years of the United States, the federal government presided over numerous bailouts — until Congress said no more in the mid-1840s. The economist C. Randall Henning, an expert on the topic, has described in detail that, in the early years of the United States, the federal government presided over numerous bailouts, until Congress stopped it in the mid-1840s.
For better or worse, American states got the message and the majority of them have adopted various legal statutes that require them to balance their budgets each year. For better or worse, American states got the message, and a majority of them have adopted various legal statutes that require them to balance their budgets each year.
As Mr. Wyplosz sees it, if the likes of Greece, Portugal and Ireland, as well as Spain and Italy, were to become convinced that Brussels — and Berlin in particular — would rather have them default than deploy other countries’ taxpayer funds to give them another chance, then they might put in place similar laws that would prevent them from running up budget deficits. As Mr. Wyplosz sees it, if countries like Greece, Portugal and Ireland, as well as Spain and Italy, were to become convinced that Brussels — and Berlin in particular — would rather have them default than deploy other countries’ taxpayer money to give them another chance, then they might put in place similar laws that would prevent them from running up budget deficits.
Of course, the process would not be pretty. As has been the case in the United States, defaults might occur and markets would convulse. But only then, these economists say, would politicians learn that it was in their own interest to be fiscally responsible.Of course, the process would not be pretty. As has been the case in the United States, defaults might occur and markets would convulse. But only then, these economists say, would politicians learn that it was in their own interest to be fiscally responsible.
“At the end of the day, these countries are sovereign — we can’t just send in the troops to get things done,” Mr. Wyplosz said. The no-bailout treaty rule, he said, “works via incentives and not enforcement.”“At the end of the day, these countries are sovereign — we can’t just send in the troops to get things done,” Mr. Wyplosz said. The no-bailout treaty rule, he said, “works via incentives and not enforcement.”
Despite all the financial difficulties suffered by California, Illinois and others, the average debt of American states relative to the size of their own economies is 7.7 percent of G.D.P. That is far below the U.S. federal figure of 107 percent of G.D.P. and Greece’s current figure approaching 200 percent. Despite all the financial difficulties suffered by California, Illinois and others, the average debt of American states relative to the size of their own economies is 7.7 percent of G.D.P., far below the federal figure of 107 percent and Greece’s current figure.
To some extent, Europe may be edging toward the American model. To some extent, Europe may be edging toward the American model. As part of a new fiscal compact agreed to by the European Union last year, but not yet ratified by all members, governments must establish laws that, among other things, will make it illegal in the future for a country to have a budget deficit of more than 3 percent of G.D.P.
As part of a new fiscal compact agreed to by the European Union last year, but not yet ratified by all members, governments must establish laws that, among other things, will make it illegal in the future for a country to have a budget deficit of more than 3 percent of G.D.P. Already, five countries in the euro zone have written such debt limits into their constitutions: Germany, Italy, Spain, Slovakia and Malta. But most of the rest aim to do it through new laws.
Already, five countries in the euro zone have written such debt limits into their constitutions: Germany, Italy, Spain, Slovakia and Malta. And as Nicolaus Heinen, a Deutsche Bank analyst, points out in a detailed study on the topic, laws are easier to override or rewrite than constitutions. And under the new fiscal compact, the punishment by Brussels if a Parliament overturns one of those new laws is but a fiscal slap on the wrist: a penalty of only 0.1 percent of G.D.P.
But most of the rest aim to do it through new laws.
And as Nicolaus Heinen, a Deutsche Bank analyst, points out in a detailed study on the topic, laws are easier to override or rewrite than constitutions. And under the new fiscal compact, the sanction by Brussels if a parliament overturns one of those new laws is but a fiscal slap on the wrist: a penalty of only 0.1 percent of G.D.P.
“This is all part of a strategy on the part of Europe to change the fiscal mentality of these countries,” Mr. Heinen said.“This is all part of a strategy on the part of Europe to change the fiscal mentality of these countries,” Mr. Heinen said.
Whether governments follow their own new rules remains to be seen.Whether governments follow their own new rules remains to be seen.