Time for euro creditors to reward their allies

06.07.15 Publication:

What will happen now after Greece’sresounding ‘No’ lies in the hands of fresh negotiations, Greek banking solvency
and the nerve of the triumphant Alexis Tsipras. No doubt he will demand rapid
debt relief in return for new Greek promises of fiscal restraint and economic
reform that represent apparent concessions from his previous negotiating
position; most probably the euro-zone creditors will refuse, for the same
reasons they have refused before, namely that they won’t, or politically can’t,
grant special privileges to just one euro member, and that they don’t trust any
promises coming from Mr Tsipras.


Right now, Doris Day has the right slogan
for Greece: “Che sera, sera”, whatever will be will be. Among the countless
metaphors-turned-cliches used during the long Greek crisis, the most apposite
has always been the theatrical one, namely tragedy. For Greece, there is no
good outcome.


For the euro as a whole, however, that is
not true. Tragedy is all too possible, but far from inevitable. To avoid it,
euro-zone leaders would do best to think and act now. And in doing so, the
creditors among them, led of course by Germany, could reflect upon what for
them has been one of the few positive aspects of the Greek saga.


This is the quite surprising—particularly
to Mr Tsipras—solidarity that has been shown by the other 18 members of the
euro, whether rich or poor, creditor or debtor. Early glimmers of support and
sympathy for Greece from France and Italy soon disappeared; if he expected any
support from those euro members that are poorer than Greece, such as Slovakia,
Slovenia or the Baltics, then he was swiftly disabused.


These euro members have shown a respect for
the rules over fiscal policy and sovereign debt that in many ways the economic
performance of the euro-zone has not deserved. It takes just one statistic to
demonstrate this: seven years after the global financial crisis began in 2008
there remain more than 17.7 million people unemployed in the euro countries,
while in the United States, where after all the financial crisis was born,
unemployment is down to 8.3 million. The population of all 19 euro countries is
335 million; that of the USA is 320 million.


It is time to reward those euro allies for
their support and perseverance. The danger posed to them, and the single
European currency itself, from the Greek vote and probable Grexit is not
economic or financial contagion. It is political contagion.


Cheering on Mr Tsipras’s referendum triumph
are all the anti-euro and anti-establishment political parties that have been
gathering strength in recent years from the currency area’s dismal economic
record and from tensions over immigration and especially the migrant crisis in
the Mediterranean: Marine Le Pen’s Front National in France; in Italy Beppe
Grillo’s Five Star Movement and Matteo Salvini’s Northern League; in Spain,
Podemos; and so on around the continent.

If these political parties are not to
prosper in elections due in 2016 and 2017 in Spain, France and Italy, to name
but three, then the euro area is going to need to up its economic and political
game. It is going to have to replace the current atmosphere of economic failure
and fragility with one of hope and real initiative.


Fortunately, the way in which this could be
done is quite clear, at least on paper. It can be done by taking two existing
proposals-cum-initiatives by the European Commission, doubling or trebling
their ambition, and making them real; and by adding a third, to bind the euro’s
monetary union closer together.


The existing proposals to be picked up and
run with are the pledge to complete the European Union’s single market, by
extending it into services and the digital economy, and the programme of public
investment currently associated with the Commission’s president, Jean-Claude
Juncker and for having attached to it a pathetic amount of money (€300 billion,
most of it purely theoretical).


Single-market based  liberalization is the core of what
policy-makers mean when they talk of “structural reforms”; the main missing
part is the labour market, which belongs in domestic politics thanks to its
sensitivity. Public investment involves public debt, which has hitherto been
anathema to the creditors. But with Greece out of the way, it is surely time to
redefine the euro area’s fiscal rules to distinguish between current and
capital expenditure, or else to devise common financing methods for new public
infrastructure spending, policed by the European Commission. A natural target
for such infrastructure is energy, subject of another Commission proposal that
has so far got nowhere, namely to build a common European electricity grid and
gas pipeline network – which would be a further way to distance Europe from
Vladimir Putin.


The third element which would bind the euro
zone closer together would be to introduce collectively-backed Eurobonds for
government borrowing in the zone. This is toxic in German politics, since it
would put German taxpayers at risk for other people’s borrowing. The euro-zone
could not move there immediately or quickly. Instead, what could be done would
be to set out a path towards Eurobonds, either as new issues or to replace some
existing debt, laying out the intention to deploy them but also laying out
conditions that have to be satisfied before they can be introduced.


Without collective responsibility for debt,
under fiscal rules and with a banking union, the euro area will never be a full
monetary union, and without it, the euro will always live under the shadow of
doubt about its permanence.


Permanence, combined with hope, would be
the best reward the euro area’s creditors could now offer their allies.