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Benefits of the Greek Crisis

Why the eurozone will become more stable — thanks to the Tsipras episode.

July 1, 2015

Credit: Theophilos Papadopoulos-

Amidst the chaos in Greece, the key question is not how to prevent this sort of crisis in the future.

The realities of today’s democracies and their politicians have taught us that crises are unavoidable. This is not just a European phenomenon. The United States has its own little Greece – called Puerto Rico. Even California and New York ran into financial trouble in recent years.

What really matters is to keep the mess caused by individual members from spilling over to the entire union and eroding the common currency. In America, this has worked reasonably well. How can we achieve the same in Europe?

Many say this is impossible: If you want peace, get rid of the euro – a poorly designed currency to begin with. With so many different countries and politicians of varying temperaments, Europe is simply not made for a common currency.

This line of argument, however, underestimates the differences that also exist between U.S. states. We should not forget that there had already been currency crises – lots of them – well before the euro was born.

For countries like Germany, the crises of the past were much more dramatic. There was a time when the German mark appreciated up to a point where the Bundesbank had to intervene in the currency markets with tens of billions. The whole export industry, Germany’s job machine, was at stake.

This is precisely the reason why the euro was introduced – to prevent monetary stability from being undermined again. Abolishing the euro today would be casting out demons by Beelzebub. Much would be lost, nothing gained.

Need for integration

So what can be done? The “five Brussels presidents” (of the Council, the Commission, the Euro Group, the Parliament and the European Central Bank) have submitted a different proposal last week. Europe needs more integration, they say, to prevent such a thing from happening again.

According to their plan, the EU members must be tied together more closely. We cannot afford any more Athens-style extravaganzas. What the presidents have in mind is a fiscal and banking union with a European finance minister and a European budget.

That sounds plausible. In the past, no currency has survived that was not backed by a government with the power to enforce stability rules when necessary. All voluntary agreements, like the Latin Monetary Union in the 19th century, have failed.

But the problem is that the European people today want less – not more – integration. Brussels is as unpopular as it gets. Things are quite different today than in the days of German chancellor Helmut Kohl and his finance minister Theo Waigel. Many in the 1990s embraced their open campaign for a political union in Europe.

Letting the market forces rule

So if this approach no longer works, what do we do? There is an alternative model – which is exactly the opposite of what the five presidents propose.

It is not about more regulation, but about more freedom for member states. Anyone who adopts the euro must bear their own responsibility for stability policy. This also means bearing the consequences if the requirements are not met.

It would be up to the market – not Brussels – to decide whether or not a country complies with stability criteria. The market would punish bad policy with higher interest rates or question the country’s membership in the currency union – or both.

The market forces can be much more painful than verbal warnings from Brussels. And best of all, the blame game would finally stop.

Some say this would inevitably lead to permanent currency crises. After all, the markets would always speculate against underperformers. Maybe so, but it would only affect countries that engage in irresponsible policymaking.

That is exactly what needs to be prevented. And it can be done: The Austrian schilling remained stable vis-à-vis the German mark for more than two decades without ever becoming a target of speculation (except once for a few hours).

The three conditions

In order to implement such a model, of course, some conditions must be met. First, there must be an exit clause from the euro. Anyone must be allowed to leave the monetary union. It should also be possible to exclude countries if their behavior no longer meets the requirements of a monetary union. Otherwise, the market forces would become a blunt weapon.

Second, there must be the option of a sovereign default. It is not carved in stone that a state cannot go bankrupt in a monetary union. In the United States, several states have slipped into default in the past without being forced to withdraw from the dollar.

What is needed in such a case, however, are strict rules for an orderly state bankruptcy. They must be different from corporate bankruptcy rules. Unlike companies, states do not disappear from the map but continue to exist even if they are broke.

There must be a precise definition at what point a state is considered in default, and by whom (and in what sequence) creditors will be serviced.

Third, the ties between states and banks must be loosened. It must not happen that bankrupt states take the banks down with them, thus causing a breakdown of the payment system.

Again, this is where the market forces would kick in. If the banks know that a state can go bankrupt, loaning money to governments would no longer be risk-free. Banks would be more cautious with loans to public bodies.

If governments can no longer finance themselves on favorable terms, they would be forced to exercise more self-discipline.


The mess caused by individual members shouldn’t be allowed to spill over to the entire union.

There must be an exit clause from the euro. Anyone must be allowed to leave the monetary union.

Strict rules, different from corporate bankruptcy rules, have to be set for an orderly state bankruptcy.

Bankrupt states cannot take the banks down with them; ties between the two must be loosened.