I have never really understood the idea that the Greek fiscal crisis is “a threat to the euro” but have generally sensed the tide running against me on this one as serious people warn darkly about the wider repercussions of a Greek default. Still, I find the arguments in this new CEPR Policy Insight paper from Jacques Melitz (“Eurozone Reform: A Proposal”) to be pretty convincing.
Melitz argues that much of the damage to the Euro caused by the Greek crisis has been due to the inaccurate focus by EU officials on the centrality of fiscal discipline. Some quotes:
The European problem is largely self-inflicted. There have been repeated affirmations by the ECB and government officials in Eurozone member countries that fiscal discipline and the Stability and Growth Pact are the very foundation stone of the Eurozone. This can only mean that Greek default is a big problem for the euro. On this view, the Eurozone is partly a victim of its own self representation …
So far as I can see, there is little reason why Eurozone should view government defaults with any greater alarm than any other central bank management in the world would view government defaults within its territory. To the contrary, the Eurozone is particularly well armed to deal with such defaults, since its own central bank has no large central government to contend with, the Maastricht Treaty guarantees the central bank’s independence and member governments are explicitly forbidden to bailout one another …
Accordingly, must not the official doctrine change? Should it not be that nothing so manageable as a Greek government default can upset Eurozone? In the event of a Greek government default, the system would assure the stability of the Greek financial sector, and concern itself with any bank runs or bank failures in the country, but not with the Greek government’s difficulties. In step with this doctrine, government bail-outs will never be contemplated. The Stability and Growth Pact will continue to serve as a code of good fiscal conduct for all members of the EU. But if any individual member government engages in irresponsible fiscal conduct, contrary to the Pact, its taxpayers and the creditors will bear the consequences.
Melitz argues that rather than institutionalising bailouts, there should be EU-level financial supervision of banks under the auspices of the ECB to allow for more efficient containment of the effects of fiscal default on financial stability.