MORAL HAZARD AND THE EURO CRISIS
October 7, 2011 § 3 Comments
The crisis that this week engulfed the Franco-Belgian Dexia Bank revealed how close Europe is to a new banking meltdown, and to an economic crisis that could be as devastating as that of 2008. It also revealed the dirty little secret about the eurozone crisis. Last week, after a lot of political arm-twisting, the Bundestag approved extra funds for an expanded European Financial Stability Facility (EFSF) ostensibly for the bailout of Greece. In truth, Germany – and other eurozone nations – are bailing out not Greece but the banks that lent to Greece. They are stumping up money to stop Athens from uncontrollably defaulting, bringing down banks in France, Germany and elsewhere, thereby unleashing a new financial crisis. The proximate cause of the problem may be Greek debt. But the real worry is of a banking collapse in northern Europe.
One of the key criticisms of the EFSF bailout is that it rewards Greece for its mistakes, for breaking the rules of the eurozone project and indeed for the fraud that Athens perpetrated in accounting for its debt. The bailout, many argue, will lead to moral hazard – the rewarding of wrongdoers for the wrong they have done. But not only is the bailout really not of Greece but of the banks that foolishly lent to it, but rule-breaking was once almost the norm in the eurozone. When the single currency was launched in 1999, all nations agreed that a country’s annual deficit should be limited to 3 per cent of GDP and the total accumulated debt to 60 per cent of GDP. Miscreants were supposed to face a heavy fine. Within five years the two biggest economies in the eurozone, Germany and France, had broken the debt rules for three years in a row. Not wishing to slap down the most important countries in the project, Eurocrats quietly ignored the rule breaking. No sanctions were imposed.
In the first decade of the euro, debt was the weapon of choice for all the major economies of the West. On both sides of the Atlantic, politicians and central bankers allowed borrowing to take off. As productive economic activity and living standards stagnated, credit – both private and public – took the strain.
In a world that lived upon rising debt, the euro project seemed to be working in everyone’s favour. It strapped southern Europe to the north. Northern banks lent to the south, in the expectation of making large profits. The south looked upon borrowing as providing an easy route out of low living standards without having to engage with the complexities of investment and growth. The north saw in southern borrowing the possibility of creating new markets for its goods. Putting money in the hands of consumers in Greece, Italy, Spain, Portugal and elsewhere fuelled new demands for cars and dishwashers and TVs. Then came the crash of 2008. Debt suddenly became the problem rather than the solution. And increasingly the problem was not just private or corporate debt but sovereign debt, too. Whereas at the beginning of the decade, rule breaking by the big boys was seen as acceptable, now rule breaking by the small fry was condemned as invidious. What was really exposed was not simply moral hazard but moral hypocrisy, too.
As for the argument that wrongdoers must be punished, who exactly are the wrongdoers that are being punished? Not the bankers who will be bailed out by the taxpayers, nor the politicians now using populist rhetoric against the ‘profligate’ south to shore up their electoral prospects, nor yet the bureaucrats in Brussels who are still cooking up new schemes, not having learnt the lessons of the failures of the old ones. Rather, the people being punished are the pensioners and street cleaners and teachers of Athens and Thessalonika (and of Rome and Madrid and Lisbon and Dublin, not to mention of London and Paris and Berlin) upon whom an invidious austerity programme is being imposed as the price for being ‘bailed out’. The average wage in Greece is under €20,000 a year. The average pension is €9000 year. A higher percentage of the population lives below the poverty line in Greece than in any other eurozone nation. The fact that such people are now regarded as profligates who need teaching a lesson – that is the real moral outrage.
The crisis raises questions not just of the Euro project but of capitalism itself. In a recent edition of The Moral Maze on the morality of the bailout, one of the participants was the philosopher Jamie Whyte, a fierce advocate of free market economics. Whyte acknowledged that the real bailout is not of Greece but of banks but opposed it on the moral grounds that the banks should have to pay for the bad decisions they had made. It is an argument, I pointed out, that applied not just to the bailout of banks that had lent to Greece, but also to previous bailouts in Europe and America in the wake of the 2008 crash. Did Whyte believe that it would have been morally better not to have bailed out the banks then, to have had a full scale financial meltdown and for us now to be sitting in the middle of a Depression? He did, he responded. The bailouts, he suggested, are simply delaying the real crisis, not solving it.
On that Whyte may well be right. There is widespread recognition that however large the EFSF pot gets – and already the talk is of trillions rather than of billions of Euros – Greece is likely to default. And Greece is unlikely to be the only country to do so. But what, in Whyte’s eyes, is the alternative to bailouts? It is to allow banks to fail, to sit back as businesses, and even whole industries, collapse and to impose mass austerity programmes as the price of economic regeneration. What does it say about the morality of an economic system that relies first on creating a mountain of debt to keep economies from grinding to a halt and then requires businesses to collapse and the poorest to be punished as a way dealing with the consequences of that debt? There are, of course, few takers these days for the idea of an alternative to a market economy. That does not make the current system either economically sound or morally good.