German Finagling of Rules, Bailouts and Bond Markets Send Eurozone Hurtling Toward Oblivion

by Avinash D. Persaud, Peterson Institute for International Economics

The Greek tragedy contains more than its fair share of irony. Perhaps the biggest irony of all is that in the drafting of the Maastricht Treaty on Economic and Monetary Union in the late 1990s, it was Germany that insisted on the “no bailout” clause. A Greek default in 2010 would have avoided Greece’s fiscal troubles cascading into an existential moment for the European Union. This is something many, including myself, proposed. But Germany and France did not want that. They feared that the damage it would do to the German and French banks that had gorged themselves on high-yielding Greek debt would further endanger a fragile global financial system. More debt was heaped onto already impossible-to-repay levels of debt. Greece’s economic sustainability was sacrificed on the altar of European financial stability.

Benefits to a Default

Once a country is in a fiscal mess, there are economic benefits to a default. The object is not to punish creditors, but to allow a country to quickly return to the capital markets. The shame of default often leads to new political leadership, which gives credibility to new fiscal commitments. In the shadow of default, creditors

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