Once again European leaders have announced a treaty to deal with the sovereign debt crisis in Europe, most notably resulting from fiscal profligacy in Greece, Portugal, and Italy. These agreements are toothless. They have no enforcement mechanism, and they do nothing different from what the initial EU and Euro treaties did: they extract promises from all parties that they will act to reduce their annual deficits and, if they do, then other countries might help them through the difficult periods. From WaPo:
European leaders adopted a groundbreaking new treaty Monday that binds them to imposing caps on deficits and government debts to combat the painful financial crisis that has sabotaged prosperity across the continent and left it slipping toward recession.
The treaty, endorsed by 25 of the 27 European Union governments, was intended as a gesture to show skeptical financial markets that European governments are at last committed to gaining control over lax borrowing habits that over the last four decades have helped create dangerously high debts.
I nearly lost my coffee onto the computer screen when I read that. As the article further notes,
... [A] chorus of European officials and economists have questioned the wisdom of the treaty in the first place. The pact was unnecessary, they contend, because European rules — merrily ignored over the years — already forbid excessive government deficits ...
These promises might sound nice politically. But unless they can be enforced (how?), they merely prolong the agony and open the door for protracted gamesmanship.
What will Germany (and France? others?) do if Greece (along with Italy and Portugal?) does not get its fiscal house in order?
- Invasion and conquest are not likely options.
- Tell them they must try harder.
- And we really mean it this time.
- Kick them out of the EU and the Euro pact?
The last option is the only realistic one. The only question is, how long before it happens, before Greece de facto defaults even more on its debt by abandoning the Euro, and consequently many financial institutions, counting on bailouts from the IMF and their own gubmnts, lose buckets of money? Or will the taxpayers of these countries hosting these banks once again be required to bail out the stockholders and creditors of those financial institutions?
This is moral hazard, writ large on an international scale.
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Addendum: Stratfor points out that a variant of the first option listed above is not beyond the realm of possibility:
The German government proposed last week that a European commissioner be appointed to supplant the Greek government. While phrasing the German proposal this way might seem extreme, it is not unreasonable. Under the German proposal, this commissioner would hold power over the Greek national budget and taxation. Since the European Central Bank already controls the Greek currency, the euro, this would effectively transfer control of the Greek government to the European Union, since whoever controls a country's government expenditures, tax rates and monetary policy effectively controls that country. The German proposal therefore would suspend Greek sovereignty and the democratic process as the price of financial aid to Greece.
Though the European Commission rejected the proposal, the concept is far from dead, as it flows directly from the logic of the situation.
The EU rejected this proposal. Understandably. How might the EU enforce it if Greece, at the last minute, refuses to hand over the controls to their gubmnt?