A wearisome fudge that can only spawn further fudges
The failure by the Troika in 2010 to impose losses on Greece's creditors spelt doom for the eurozone
The emerging 'deal' for Greece, the alternative to the country's exit from Europe's ill-advised common currency, is shaping up to be another essay in extend-and-pretend. The last six months have been wasted by the new Greek government and the creditors - on making a bad situation worse in Greece - without any promise of a sustainable economic recovery. The closure of the banks and the consequent suspension of both internal and external payments in a sinking economy was a quite extraordinary failure of common sense.
Whether the Greek government or the eurozone leadership has made the greatest contribution to this disappointing outcome is an issue best left to their spinners and media wizards. The outcome is what counts, and it looks like there will be a deal which fails to address the debt overhang, fails to avoid further short-term deflation of the Greek economy, fails to fix the banks and fails to plot a plausible course to economic recovery.
There is no getting away from the ultimate source of this macro-policy nightmare. The response by the eurozone leadership and by the IMF - who should have known better - to the emergence of the Greek sovereign debt crisis in late 2009 and early 2010 has cast a long shadow. Instead of insisting that the private sector lenders to Greece had been foolish and should take losses, the eurozone abandoned its 'no bailout' policy and shifted the burden to the Greek treasury. The logical corollary of a no bailout policy for countries no longer able to borrow is that those who chose to lend them excessive amounts should face the consequences, quickly and without fuss. This approach should appeal to either socialists or capitalists: socialists object to the imposition of the costs of errors by private lenders on the public purse, capitalists to the distortions created by ex-post rescue of foolish investors. Capitalism is about enthusiasm in the pursuit of profits but it is also about prudence in the avoidance of losses. The decision to spare foolish lenders the losses they deserved in Greece in early 2010 was the biggest mistake in the mismanagement of the crisis in the eurozone and also an affront to both socialists and (old-fashioned) capitalists. The left-wing Greek government has been joined, in their opposition to another non-solution, by an impressive line-up of economic and financial experts around the world from all points of the political compass. The emerging 'deal' looks like another fudge and will spawn further fudges.