Moral Hazard and the Fall of the House of Maastricht

The Furies chased their prey relentlessly through many a Greek myth to punish them for their transgressions. No matter the path the Greeks choose on Sunday when they go to the polls they will almost surely be hounded by Furies going forward. Furies have been ravaging Greece since late 2008 when economies tumbled around the world. At that time the U.S. chose the distasteful strategy of bailing out banks, while Europe followed the more Spartan path of austerity. The Furies of austerity for Greece have seen unemployment reach 27 percent, 50 percent among the young and even reports of hunger.

Fears of a bank collapse sent thousands of Greeks to their ATMs last week to save their savings, just as Americans did in 1933. And just as Franklin Roosevelt did during our depression, Greek Prime Minister Alexis Tsipras closed the banks to save them from imploding from the suction of so much evacuating cash.

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If Greece votes No on Sunday, it risks European expulsion, a return to the Drachma and the danger of putting its fate into the hands of a vehemently splintered and contentious political culture that seems incapable of producing the sort of leadership that’s necessary at a time like this. Either way it will be a long brutal slog through the toughest economic conditions. Those loose cannons you hear banging around the decks are the rise of scary fringe parties such as the Golden Dawn.

As the world waits to see what path Greece chooses, perhaps we should be looking at the choice Europe could be taking. Can Europe really afford to lose Greece just to keep such a strict application of repayment? As The Economist points out in its cover story this week, the unknown consequences of a dysfunctional country on its southeastern border is something for Europe to think long and hard about before it allows its smug economists to intone on the tenets of Moral Hazard.

The inherent opportunity in this crisis is for Europe to forge a stronger unity by standing with its troubled states as they negotiate their way through this nightmare scenario. When the idea of the Eurozone first surfaced, there were many comparisons to the emergence of U.S. Federalism in 1789. Faced with the burden of paying the debts accrued during our Revolution, the American states were also in a desperate economic fix. President George Washington’s Secretary of the Treasury, Alexander Hamilton, who was no socialist, used the crisis to unify the states by having the federal government, which was also broke and riddled with debt, assume each state’s debt. It took courage, it caused pain and it set the U.S. up for an incredible rise to prosperity.

The National Bank emerged out of this crisis and so did the notion that we were “united” states. Hamilton, knowing how crucial international credit would be to our survival, was relentless in his insistence that the debt be paid. And the debts were staggering, but the young country stuck it out, together, despite our huge regional differences. It worked so well that by 1803, President Jefferson (an opponent of Hamilton’s strategy) had the cash to make the Louisiana Purchase.

If only Europe had a Hamilton and even more so, if only Europe would stand by their troubled states in their time of need. The bitterness of solvent countries toward the Greeks is short sighted. As Dylan Matthews points out in his, The Greek crisis: 9 questions you were too embarrassed to ask  “Every year in the US, richer states pay more in federal taxes than they get back in federal spending, and poorer states get more in federal spending than they paid in federal taxes.

“South Carolina, for example, gets $5.38 back in federal spending for every dollar it gets in taxes, according to a WalletHub analysis. Last year, it was $7.87. But we don't consider that money a bailout and we don't demand that South Carolina impose crushing austerity measures.”

Is Europe united or not?

It’s understandable that the so-called “Troika” of the European Union, the International Monetary Fund and the European Central Bank are loathe to set precedents in which the consequences of bad fiscal behavior are absorbed across Europe rather than by the national governments responsible, but there was plenty of bad behavior to go around. When Greece entered the European Economic Community (EEC) in 1981, as the 10^th member, the cardinal condition for membership was sound fiscal policy. Then in 1992, the EEC became the EC or European Community, dropping the word Economic in order to indicate that the new agreement, known as the Maastricht Treaty, expanded European unity into a unity of domestic and foreign policies completely outside of the economic sector.

Maastricht also produced the euro, proving that though the middle E in the EEC was silent, it was still there. To be in the Eurozone, the Maastricht ministers said, a country had to maintain a standard of economic health in which the national debt could not exceed 60 percent of the country’s annual GDP and its annual deficits could not exceed 3 percent of GDP. In January 2002, the Greek Drachma died and the Euro was striding through the Athenian Plaka.

A couple of years later in 2004, the Greek government admitted it had been creative in its accounting; the real deficit was really 12 percent of GDP. How did they hide that discrepancy from auditors? A pair of Wall Street Banks stepped up with a creative “financial product” which enabled an overspending Greek government to mask its borrowing beneath the sheep’s clothing of investment. Thus things appeared to be normal in the Greek economy until 2008 when the economic fissures were exposed. The deregulated Wall Street just keeps coming up with more fun and games than a casino. Well, this one broke the Greek banks.

We keep hearing stories that imply that Greek suffering is an extension of Greek lifestyle. Zorba is always too busy dancing to balance his checkbook. These old clichéd attitudes about lazy Mediterraneans and prudent northerners have to go into the same toxic bin as the Confederate Flag. The Greek people are the ones doing the suffering for the poor leadership and the financial shell games of crafty banks.

To some extent they’re culpable. Greece invented the very idea of citizenship and the well documented evasion of taxes in Greece is beneath their history. In his essay, Matthews cites a 2012 study “comparing Greek bank account data with government tax data (that) found that the true income of the average Greek person is about 92 percent higher than the income they report to the government.”

The Greek people have to overcome their cynical feeling about government and become the tax-paying citizens that their country needs. At the same time Europe should embrace this moment as an opportunity to stand together with its weakest (economically) members; and all of them and all of us should carefully scrutinize anything that crafty financial villains offer to fix our problems.

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