The Greek Haircut and Europe's Shared Responsibility
The national election turned over Spain's government, but the remedy on the way -- fiscal austerity as pushed by Berlin and the European Central Bank -- will only make Madrid's problems worse. Cutting will not save the euro.
Since the outbreak of the financial crisis in 2008, the German government has been fixated on the dangers of moral hazard: Berlin has resisted calls to foot the bill for the reckless spending of its profligate counterparts in Athens, Rome, and elsewhere. However sensible it might sound, this outlook has fed the German public’s opposition to bailouts of weaker EU countries, precluded a robust European response to the crisis, and fanned bond market contagion. Just look at the collapse of Italy’s government over the weekend.
German Chancellor Angela Merkel sorely needs a new agenda, one that allows her both to satisfy the demands of her reluctant electorate and salvage the eurozone by containing the sovereign debt crisis. The recent “Greek haircut,” in which eurozone officials brokered a deal to cut bondholder claims on Greek debt as part of a bailout package, offers just such an opportunity to shift the political climate. Merkel should present a plan to the euro group whereby debt-ridden countries such as Ireland, Italy, and Portugal would reissue their debt backed by collateral from the eurozone, while private bondholders (mostly large French and German banks) would write down existing holdings in exchange for new, more liquid and secure bonds. Only if all those with a stake in the future of Europe -- including the governments in the core and the private sector -- share the responsibility for its rescue, will a return to growth and prosperity on the continent be possible.
Germany has so far made fiscal support to its neighbors contingent on severe austerity cuts, fearing that unconditionally bankrolling the lavish spending of others would create moral hazard. This position stems from the view, expressed by German Finance Minister Wolfgang Schäuble in a recent interview with the Financial Times, that “whatever role the markets may have played in catalyzing the sovereign debt crisis in the eurozone,” it is mostly a result of “excessive state spending.” This is a dangerous attitude, as it blurs the shared responsibility for the crisis, undermines German political support for the region, and risks the economic stagnation that imposed austerity could cause Europe...