Barcelona GSE faculty offer their reflections on the Greek bailout, the euro, and the future of the European Monetary Union.
Juan Carlos Conesa (UAB and Barcelona GSE)
The current Greek crisis illustrates the problems of moral hazard and time inconsistency in the design of public policy. To avoid fiscal irresponsibility of member states one would like to commit to a no bailout policy (that is the moral hazard part). However, this policy is not time consistent and international investors anticipate that the EU might eventually bail out Greece, creating room for speculative attacks.
It is a very hard problem and I do not see an easy way out, maybe after the integration of currency and monetary policy it is now time to start thinking about a stronger coordination on the fiscal policy and institutional side of the EU integration process.
Xavier Freixas (UPF and Barcelona GSE)
Director, MSc in Finance
I have always dreamed of a European Union with a unique debt market, where an insurance mechanism would make each country’s debt safe and attract non-European investors. This was not possible because there was no way one European country could bail out another as it would imply fiscal solidarity. Now, paradoxically, with typical time inconsistency, we neither have the insurance premiums nor the foreign investors but we are about to pay the full cost, as the alternative - bringing in the IMF - has too a high political cost.
Is this the right solution? If the European Union is able to impose conditionality to the loan, as the IMF does, it sounds like the right solution. If this is not the case, it would definitely be better to pay the political cost of bringing in the IMF; otherwise, in the future, countries like Ireland will not enter a program of strict budgetary discipline but will go for a European bailout. Indeed, a bailout will set a precedent and will forge the countries' future incentives.
The causes of the Greek breakdown are common to many European countries. It comes from the discrepancy between the planning horizon of a government, ranging from 4 to 8 years, and the planning horizon for social services such as education and pensions, ranging from 20 to 40 years. When there is no culture of long term constraints and no politically independent institutions to guarantee the long-term rights of citizens to social services, political parties may enter into a short-run dynamics to the detriment of public services over time and the creation of abysmal budget deficits.
Evi Pappa (UAB and Barcelona GSE)
Faculty member, MSc in Macroeconomic Policy and Financial Markets
By any measure, modern Greece lives far from the Age of Pericles. This is the fault of Neo-Greek citizens but mostly of their representatives. Greece’s bad current condition is the result of a prolonged period of bad fiscal policy and irresponsible private action.
Since the introduction of Greece in Europe, Greek politicians have played around with the wedge between actual and reported numbers in the European Commission concerning their debt and deficit positions. The current situation is proof of this. In addition, the degree of corruption in Greece is far above the ground. Exchanges of government with monastery properties, auction scandals and the like are part of the Greek reality. Aside from the ailing public sector, a tremendous underground economy exists in the Greek private sector. Estimates of the underground activities vary between 30% and 40% of GDP.
Leaving the euro zone is not an option for Greece, although I doubt that Greek citizens at the moment realize this. Neo-Greeks lack economic education. Presenters, political parties and some reporters blame Europe for their misfortunes as their ancestors blamed Poseidon for the lack of wind.
However, the bailout per se is not a real solution for Greece either. It might be a solution for Europe at the moment, but the Greek economy needs structural reforms and any bailout has to be made explicitly conditioning on an imperative structural reform in Greece. If a bailout is to happen, another social planner has to be improvised in Greece to creatively destruct the country's public sector. Otherwise, Greece may very well bring Europe more trouble in the future.
The only other option is to let Greece perform a miracle by reducing its deficit by 9% points within one or two years, an option that seems too surreal to contemplate.
Joachim Voth (ICREA-UPF, CREI and Barcelona GSE)
It's pretty clear that Greece should never have been admitted to the Euro. It forged the national accounts and deficit figures, and never signed up in earnest to the structural reforms or the budget discipline that the Euro was meant to promote.
The right solution is that Greece is asked to leave the EMU. A rapid ejection from the EMU will focus the minds of policymakers in other countries struggling with the implications of Euro discipline such as Spain and Portugal. It has few macro implications since Greece is too small to matter for Europe's economy, and it will weaken the Euro on currency markets -- which will make the Euro area's exports more competitive. Last but not least, the EU would for once respect the express wishes of its citizens, namely those of the many Greeks who are demonstrating in favor of the bad old ways of spend and borrow.