Ahead of tomorrow's summit of EU leaders, we have published a new briefing looking at 10 different ways in which Greece can be bailed out. At the moment, some sort of eurozone credit facility or an IMF-style 'euro fund' seem to be the frontrunners. However, it's unclear whether these two options are actually legal under the EU Treaties 'no bailout' and 'no credit facility' clauses. (in fact, of the 10 possible bailout scenarios we looked at, only one - early payments of structural funds - is unambiguously legal under the EU treaties).
Obviously lots of issues are on the table at the moment, but at least three consequences of a bailout are worth hammering home.
First, as has been widely documented and argued, watering down the EU's 'no bailout' clause and the 'no credit facility' clause creates moral hazard of unprecedented proportions, and has previously been fiercely resisted by a whole range of EU politicans and central bankers - particularly in Germany. Former Chief Economist at the ECB, Otmar Issing, has said that this would spell an end to "the political stability of the monetary union". He said that, in order for financial discipline to prevail, every member state must be responsible for its own debt and deficits: "without this there would be no end", he said.
Secondly, short term measures will not address the structural lack of competitiveness that affects not only Greece, but also countries such as Spain and Portugal. In order for the differences in competiveness within the eurozone to be addressed, a one-off bailout would need to be followed by continuous financial transfers from the poorer bloc to the richer bloc within the eurozone. Indeed, there would be no end.
Thirdly, there's no public mandate or support for establishing a formal system of fiscal transfers - polling by Open Europe shows that 70% of Germans are against using taxpayers to bail out another member state. This means that eurozone countries are stuck in a very tricky dilemma: either accept continual strains on the eurozone, stemming from the weakness of Greece and others, or pursue a policy of closer economic integration, for which there's no public support.
Some key people in Brussels now seem to be set on the latter alternative. Commission President Jose Manuel Barroso has already said he plans to interfere more in national economic policies, stating that “economic policy isn’t a national, but a European matter. No modern economy is an island. When a member state doesn’t make reforms, others suffer because of that.”
Likewise, EU President Herman Van Rompuy has said, “Whether it is called coordination of policies or economic government” only the European nations working together are “capable of delivering and sustaining a common European strategy for more growth and more jobs…Recent developments in the euro area highlight the urgent need to strengthen our economic governance”.
Former European Commission President Romano Prodi once said that a future crisis could be exploited to radically speed up the pace of economic union: "The euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible now. But some day there will be a crisis and new instruments will be created."
It seems Barroso and Van Rompuy are intent on proving him right.
For the immediate short term purpose of helping out Greece, as we argue in our briefing, the simplest and most sensible option would be to go to the IMF. The Swedes and the UK reportedly both want it but it seems as though the eurozone standard-bearer, Germany, is too proud to contemplate this route.
So integrationist politicians now see in the financial crisis and the introduction of the Lisbon Treaty a chance to take a quantum leap towards a common economic government in the EU and it seems that even Germany - that so far has opposed any movement towards EU fiscal federalism - may be willing to move out of the way.