One theoretical way out of the Greece fiscal crisis for the Eurozone might be to apply standard Coase Theorem logic and find a way in which Germany could, under whatever face-saving language is necessary, bribe Greece to withdraw from the Euro. The intent would be to get Greece off the Euro so that it could not cause more damage in the future (leaving aside, of course, all the Euro denominated bonds already out there) to the whole Euro as a currency, but giving Greece an incentive to do so, perhaps by providing some kind of mechanism to stave off bankruptcy or ensure that the debt can be turned over or otherwise have access to the capital markets.
Since, as Dutch scholar Martinned points out in the comments, the Euro is a one way ticket for all parties, getting someone out does not seem to be an option as such, the abilities to force Greece out appear to be perhaps even more remote than convincing it to reform its fiscal position, there is not where to go with this kind of analysis. Put another way, the limit of getting Greece out of the Euro is an even further limit than the limit of Greek bankruptcy.
Still, a deal by which Berlin bribes Athens to get it out of its ability to poison the whole game does not appear crazy as a purely theoretical matter. Practically … it doesn’t seem like it. Although talk of a “firewall” suggests something in these directions. I have no evidence of any kind that such discussions are proceeding – zero. It’s just a thought on my part and possibly a silly one. Feel free to tell me either way in the comments.
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(Update 2:) Let me add, based on the comments from Dutch scholar Martinned and others, it is starting to look as though Greece is not bribable because the rest of the EU doesn’t really have a legal option to force them out – meaning, quite apart from Greece’s internal coordination problems, its rational move is to threaten default and force the rest of the EU, ie Germany, to bail it out, under whatever suitable language and political cover can be found. That does not seem like an irrelevant conclusion to investors.
How you frame that as an investment bet is not completely clear, however. Betting against the euro is consistent with this hypothesis - if it is true that Greece can’t be forced out, and it either defaults or gets bailed out, hard to see that this is not bad for the euro. But now, betting against Greek bonds? If you think Greece will get bailed out, then why bet against them? But maybe you would prefer to see pressure put on Greek bonds in order to drive up the value of your euro-short? The interaction of Greek bond strategies and short-euro strategies makes it hard to see a clear result simply from the surface of Greek bond spreads, looking back to the chart I posted yesterday. Or am I missing something? (End update.)
(Update 3: Financial Times reports today (Wed, Feb 10, 2010) that the pressures downward on the Euro are forcing Berlin to have to fashion a rescue, but that it is trying to build some kind of firewall between it and Greece.)
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However, hunting around for Coase Theorem hypotheticals that didn’t involve the standard nuisance and pollution type cases for my 1L law and economics course – pure hypos without transaction costs, then gradually adding transactions costs back in – it occurred to me that I could structure a hypo around this kind of issue.
So … as the WSJ and FT pointed out in my earlier posts on Greece and the problems of the southern Eurozone as against the northern Eurozone of Germany, the two main options for Greece are
- (i) withdraw from the Euro and devalue; or
- (ii) get a bailout from the Eurozone, which is particularly unpalatable to German voters (but which anyway would come with fiscal requirements that it seems hard to believe that Greece would ever persuade itself to meet).
Is there a way in which Germany and the still solvent part of the Eurozone of the north could bribe Greece to “temporarily” withdraw from the Euro? Reaching an “efficient” solution in which Germany pays less than it otherwise would from a full euro-bailout, but pays something, essentially as a premium for getting Greece out of the euro with all the long term risks that presents.
(Note, from a Coasean perspective, that one of the problems here is not just transaction costs, but apparently the problem that the legal rights are not fully specified. I mean by that in part that it’s not clear (so far as I can tell, I might be wrong) how and whether there are any options for forcing Greece out of the euro, or whether it has an absolute right to stay in or stay in with consequences legally specified or not specified. Maybe all that is somehow spelled out in various Eurozone agreements and directives, and I’ll leave the international banking lawyers to tell me, but I’ve been unable to see something that clearly specifies the legal rights involved.)
I assume there is also a problem of past debts already being denominated in euros. And probably lots of other problems as well. However, explain why, or why not, it would not be in principle a good idea to combine the two options above and have the Eurozone pay to have Greece withdraw. With some kind of politically face-saving explanation about “temporary” or what have you – but still getting out? What and how much (or at least the factors affecting such) would the solvent Eurozone have to pay, and what would be the pressures on that price – I assume the implied costs of the legal rules involved, related to default, forcing Greece out, other things.
Am I right in thinking that someone must already be far, far along the curve in thinking through such possibilities? Can someone point me to published sources? Or is there a reason why this idea is a non-starter? Finally, how would you frame this as a Coasean hypothetical, limited to one paragraph and highly simplified? Or is it somehow not suited to work as a Coase Theorem hypo?
(Update:) Thanks to Dutch international law scholar Martinned in the comments to an earlier post, here is a summary of the relevant rules regarding ‘in’ and ‘out’ of the euro. Two further questions:
- First, does this support the proposition that Greece won’t be bribable because staying in the euro is its best deal?
- Second, does this sufficiently specify the legal rights such that you could create a Coase Theorem hypo based around bargaining by, let’s say for simplicity, Greece and Germany? Even if the result were, Greek default?
Martinned@prof. Anderson: Everything you need to know about countries being kicked out of the Eurozone, leaving unilaterally, etc. is in this ECB working paper from December. In a nutshell, the answer is that it can’t be done. The Treaties are written based on the assumption that all EU member states are members of the Eurozone, and that to the extent that some are not, this is temporary. The idea of going from inside the Eurozone to outside was simply never contemplated. Under the Lisbon Treaty, Greece now has the explicit right to leave the EU as a whole, but there is no way to make a country leave the EU. A country’s voting rights in the Council can be suspended for human rights infractions, and a country can be fined for sins against the stability and growth pact. Those are about the most drastic measures that can be taken.
So nobody can force anybody to do anything. Greece can’t be forced out of the Euro or the EU, and the others can’t be forced to bail Greece out. (At least not legally.) If Greece defaults, that is unfortunate, but the only consequences that would have for the other MS are economic. (i.e. Market panic and other contagion.)
ChrisHo says:
Well it would be a good way to totally bankrupt Greece and do incredible harm to businesses within it, let alone to the people of Greece.
How would you ever convince them to come back?
How would you reassure other nations who may face similar problems they won’t be kicked to the curb as well? This leads to a slippery slope where if countries fear this could happen they may take actions detrimental to the euro/eu.
February 9, 2010, 1:03 pmKenneth Anderson says:
ChrisHo: This puts very well one side of the debate … but I’m not sure that everyone would see it as “Greece being kicked to the curb.” Germany is much more likely to see it as, Greece took flagrant advantage of the ability to run Greek fiscal deficits financed by German monetary strength. So there are two sides to this – which is precisely why I would have thought it suggests a compromise bribe.
Put another way … if the question is, as you ask, “how would you ever convince them to come back?” Well … from the standpoint of Germany, the question somewhat answers itself.
February 9, 2010, 1:13 pmOren__ says:
Ken, I think you already put your finger on the problem — there is no legal structure that delineates the relative rights and responsibilities of the parties nor are there appropriate default rules that can be applied. The Coase theorem simply doesn’t apply.
Now, perhaps we can go back to the monetary union agreement and the limits on deficits and say that Greece is in material breech, but that agreement specifies neither penalty nor remedial action. Germany unfortunately agreed to this bargain which Greece was under no real obligation to uphold and, conversely, has to bear the cost of Greek default as a matter of basic consequence.
February 9, 2010, 2:14 pmSay What? says:
Germany unfortunately agreed to this bargain which Greece was under no real obligation to uphold and, conversely, has to bear the cost of Greek default as a matter of basic consequence.
I think this is the crux of the problem. As much as Germany and France would like to dump Greece (and Portugal, Spain, and Italy), there is no way they can do it unless those countries dump the Euro voluntarily. And really, what would be in it for them? If Greece hangs in there it knows that the richer countries will have to bail it out. There is nothing that Germany could offer Greece that is a better deal than sticking with the Euro.
February 9, 2010, 2:21 pmMartinned says:
Here’s the penalty and remedial action:
Art. 121 TFEU:
Art. 126 TFEU:
Fun, huh?
The problem is that, at the end of the day, each MS is still in charge of its own budget. It could hardly be any different. That’s where the big expenditure is. (The EU itself has an annual budget of about € 134 bn, which isn’t much compared to a total EU GDP of about € 12,5 trillion.)
February 9, 2010, 3:17 pmShould the Eurozone North Bribe the Eurozone South to “Temporarily” Leave? | Liberal Whoppers says:
[...] posted here: Should the Eurozone North Bribe the Eurozone South to “Temporarily” Leave? [...]
February 9, 2010, 8:51 pmOren__ says:
It’s good to see that the US Congress is no longer entirely unrivaled in its ability to say absolutely nothing in many many paragraphs. Leaving out all the unnecessary nonsense about warnings, recommendations, reports and other non-binding surplus, it boils down to this:
None of these actually seems like a remedy. If anything, the imposition of these penalties will only make things worse and increase the odds of the responsible part of Europe getting burned.
Just out of curiosity, without this provision, would the EFC be forbidden from having an opinion on the report? That is, in the EU-world, do bodies in general need statutory authorization for opinions? The mind reels.
February 9, 2010, 10:51 pmMartinned says:
Oh no, the Europeans are at least as good at it. You should read the Berlin Declaration of 2007, which celebrated the 50th anniversary of the EC and simultaneously restarted the Treaty reform process after the failure of the Constitutional treaty. This is what you get if you write a Treaty with 27 countries, each of whom has veto power. (Remember, the US constitution only needed 9 out of 13 votes, thus conveniently bypassing the amendment process written into the Articles of Confederation, which required unanimity.)
I’m not sure if “remedy” is the best word to use in this context, but otherwise you’re right. None of this stuff actually helps. But then, I’m not sure how this could have been avoided. (Except by being more careful letting people into the Eurozone in the first place.)
The provision simply means that this Committee must be asked to give its opinion, and given the opportunity (and time) to do write it all up. This is similar to how the Economic and Social Committee and the Committee of the Regions are always consulted before any bill is voted on in the Council. Their opinions are rarely read, but these guys might have something useful to say. (I’m not sure, since I don’t know who are in it.)
February 9, 2010, 11:09 pmpetB says:
Germany and other big EU countries several times declared that Euro is overvalued and this is hurting their economies. I do not see any reason why they should push for – extremely unpopular – bailout just to keep the value of Euro high?
They cannot say ‘go bust’ to Greece openly, but it is quite clear from their ‘it’s not our problem’ position.
February 10, 2010, 7:37 amOren__ says:
Well, mechanistically, how does Greece spend euros that it doesn’t have? If those transactions are cleared through the central EU bank, I think the remedy is obvious — start bouncing their checks.
February 10, 2010, 11:42 amMartinned says:
They borrow money on the open market, just like everybody else. To get money, they have to pay a spread over the Bund rate. That’s the Bund spread that everybody keeps talking about. (Including prof. Anderson, who had the spread graph in his California vs. Greece post yesterday.)
BTW, the ECB are going to “start bouncing Greece’s checks” soon. (FYI, nobody outside the US uses checks anymore…) The ECB, like any central bank, has money market facilities, which are open to the Greek banks, as long as they give Greek government bonds as collateral. The problem is that, under the normal rules, the ECB may only accept government bonds as collateral if they are rated at least “A”, which Greece’s aren’t, at the moment. This ratings rule has been temporarily relaxed in light of the economic & financial crisis, but this exception is due to end at the end of 2010. They way things are looking, that’s when the ECB will start bouncing Greece’s cheques. (See A Fistful of Euros here and here for more explanation.)
February 10, 2010, 12:04 pmpetB says:
It must borrow them. It cannot borrow from ECB – ECB charter prohibits this – it must borrow the euros in open market. The moment the market will not lend Greece the money, it will have to declare bankrupcy (as it will not be able to roll on existing debt.)
This is reason why it may be necessary to bring in third party – like IMF. Only third party may have the authority to force Greece to change its bahavior and lenders to renegotiate the debt (to longer maturities, for example.)
February 10, 2010, 12:05 pmMartinned says:
BTW, in related news, this was in EUObserver this morning:
Germany preparing to bail out Greece
ANDREW WILLIS
Today @ 09:27 CET
EUOBSERVER / BRUSSELS – Clear signs emerged on Tuesday (9 February) that Germany and other eurozone members are considering a bailout plan for Greece.
Reports suggest financial support is likely to come in the form of guarantees or bilateral loans, with EU leaders set to discuss the exact details when they meet for an informal summit on economic issues in Brussels on Thursday.
German Finance Minister Wolfgang Schäuble told officials in Berlin on Monday that he had concluded there “was no alternative” to a rescue plan, reports the Wall Street Journal citing an anonymous source.
The Financial Times quotes German officials as saying that the steep decline in the euro and pressure on bond prices has forced Berlin to “take a significant step” to deal with the Greek debt crisis.
Recent weeks have seen Greece come under tremendous pressure from financial markets due to doubts over the Greek administration’s capacity to push through tough austerity measures, leading to fears of a possible sovereign default and contagion to other eurozone members.
Athens will face a major test on Wednesday with Greek public sector workers set to strike over the government’s spending cut plans. The protests are set to cause grounded flights, shut government offices and schools and limited hospital operations.
Bailout method?
The European Investment Bank, the main provider of long-term EU loans, ended all speculation on Tuesday that it might become involved in a Greek bailout.
“The EIB’s mission and statute do not allow for bailouts in terms of budget deficits or balance of payments support to individual member-states,” Philippe Maystadt, the EIB president, said in a statement.
News that European Central Bank chief, Jean-Claude Trichet, will be flying back from Australia for Thursday’s summit helped to lift markets on Tuesday, although eurozone rules also prevent the central bank from bailing out national governments.
Non-eurozone members Sweden and the UK have suggested that the International Monetary Fund is best placed to supply financial support to Greece, although EU officials have widely rejected this method.
“We don’t need to call in the IMF,” EU economic commissioner Joaquin Almunia told the European parliament in Strasbourg on Tuesday.
Another option is the creation of a special bailout fund. “When Europe was created, they created solidarity funds for new entrants, but not for the euro members. This is what is needed now,” said economist Joseph Stiglitz, currently advising the Greek government, on British television on Tuesday evening.
A final decision on the plan may not come this week but Germany is thought to favour guarantees as the most efficient way to prevent the spread of the debt crisis.
Moral hazard
Whatever the final option, eurozone politicians will be keen to avoid a situation of moral hazard whereby chronic overspenders like Greece appear to be getting off easy.
Mr Almunia told MEPs he hoped leaders at Thursday’s summit would offer “clear support” for Greece “in exchange for clear commitment [from the Greek authorities] that they will meet their responsibilities. “You don’t get support for free,” he stressed.
Taxpayers in Germany and other eurozone members involved in the Greek rescue plan will essentially take on the risk involved in providing Greece with guarantees or a large bilateral loan.
However, policy makers appear decided that the risks associated with taking no action are far greater. As well as preventing a possible default, a resolution to Greece’s problems would help calm investor concerns over the health of public finances in Portugal and Spain.
German and French banks also have considerable exposure to the Greek economy, including billions of euros in loans to private individuals and companies.
© 2010 EUobserver.com. All rights reserved. Printed on 10.02.2010.
February 10, 2010, 12:08 pmBunny Kerntke says:
Good job, see you then. I should just give up and take lessons from you
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February 10, 2010, 2:45 pmOren__ says:
Not exactly, since they are borrowing on the strength of the whole EZ — in this sense they are more like a child with his mother’s credit card. Surely the transaction takes place on the open market but it is not in the interest of those that will ultimately hold the bill to allow this to continue happening.
Maybe some good of this and the ECB will forbid member states from issuing bonds denominated in Euros without permission.
Thanks. A question though, what good does the ECB fist-tightening do if Greece can still raise money through bonds denominated in Euros?
February 10, 2010, 8:47 pmHow to Find and Compare Individual Health Insurance Plans | Health Insurance Cheap Information says:
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February 10, 2010, 9:56 pmTCO says:
Just let them default. No German bailout. No IMF intervention. Just let them default. If they chose to default hard and completely stiff bondholders, or if they chose to give the bondholder a haircut, that’s their call.
February 10, 2010, 10:51 pmMartinned says:
I’m not sure how you come to this conclusion. Greece and Greece alone is responsible for paying back the bonds they issue. How are they borrowing “on the strength of the whole EZ”? The only benefit they have is that they have wiped out certain elements of risk: the risk of currency fluctuations in the drachme. The only way to get to your conclusion is if you can argue that lenders already assumed there was a significant probability that Greece would be bailed out in case of default. Given the fact that everybody is running around as if they’re considering the possibility of a bailout for the first time just now, that seems unlikely.
BTW, today’s EUObserver:
France and Germany to Announce Greek Rescue Plan
and
Van Rompuy: Eurozone will Bailout Greece if Needed
February 11, 2010, 9:23 am