When trying to follow the twists and turns of the euro crisis, it is worth bearing in mind two journalistic adages. First, focus on what politicians do and not what they say. Second: "Follow the money." This has been particularly true of the protracted negotiations over Greece's second bailout, which reached a climax with riots in Athens Sunday as parliament debated a tough new austerity package demanded as the price of the €130 billion ($172 billion) package. Making sense of what is going on is hard amid a stream of seemingly irreconcilable demands, ultimatums and contradictory comments by politicians in Greece and across the euro zone—until one remembers that much of this is political theater designed to appeal to domestic political audiences. When it comes to action, the politicians have ultimately acted in their national economic self-interest.
This goes for politicians in rich countries like Germany as much as it does for debtor states like Greece, Italy, Spain, Portugal or Ireland. For most of the last two years, the euro zone has done what is necessary to prevent a catastrophic collapse of the euro zone while seeking to avoid rich countries having to take responsibility for the debts of the corrupt, unreliable and unreformed economies of Southern Europe. This approach, which many argue has been too slow and inadequate, has been entirely rational. For rich European countries, it makes economic sense to preserve the euro, but not if the price is to write blank checks in perpetuity to countries whose political systems can't be trusted. It follows that the key to resolving the crisis isn't expanding bailout funds or devising clever European Central Bank programs but creating the conditions for trust.
This is what has made the Greek situation so toxic. The Greek political system doesn't—and has never—inspired trust. For over a decade, the country concealed the state of its finances. Much of the country routinely cheats on its taxes. For the last two years, much of the Greek political class seemed to think it could hold the euro zone to ransom, believing other member states would pay any price to keep Greece inside the euro. The leader of the Far Right Laos party resigned from the government Friday arguing Greece should reject the terms of the bailout since the euro zone would never allow it to default.
No one can say for sure how much better a position Greece might be in now if previous Prime Minister George Papandreou had delivered on commitments to cut the vast public sector, liberalize markets, collect taxes and privatize assets. But what is clear is that many Greeks miscalculated: they failed to appreciate how far the country's hands had been tied by the ECB. Much ink has been spilled trying to work out whether Greece's private-sector debt restructuring is voluntary or coercive, whether it will trigger credit-default swaps, or whether bond investors would be better off pushing Greece into a hard default. But this misses the point: the only definition of a voluntary deal that has ever mattered is one that doesn't inflict losses on the ECB. The need to shield the ECB, which owns around €45 billion of Greek bonds, took off the table what many fantasized was Greece's best option: simply repudiating its debts while remaining within the euro zone. Read more. (Subscription required.)
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