One theoretical way out of the Greece fiscal crisis for the Eurozone might be to apply standard Coase Theorem logic and find a way in which Germany could, under whatever face-saving language is necessary, bribe Greece to withdraw from the Euro. The intent would be to get Greece off the Euro so that it could not cause more damage in the future (leaving aside, of course, all the Euro denominated bonds already out there) to the whole Euro as a currency, but giving Greece an incentive to do so, perhaps by providing some kind of mechanism to stave off bankruptcy or ensure that the debt can be turned over or otherwise have access to the capital markets.
Since, as Dutch scholar Martinned points out in the comments, the Euro is a one way ticket for all parties, getting someone out does not seem to be an option as such, the abilities to force Greece out appear to be perhaps even more remote than convincing it to reform its fiscal position, there is not where to go with this kind of analysis. Put another way, the limit of getting Greece out of the Euro is an even further limit than the limit of Greek bankruptcy.
Still, a deal by which Berlin bribes Athens to get it out of its ability to poison the whole game does not appear crazy as a purely theoretical matter. Practically ... it doesn’t seem like it. Although talk of a “firewall” suggests something in these directions. I have no evidence of any kind that such discussions are proceeding – zero. It’s just a thought on my part and possibly a silly one. Feel free to tell me either way in the comments.
(Update 2:) Let me add, based on the comments from Dutch scholar Martinned and others, it is starting to look as though Greece is not bribable because the rest of the EU doesn’t really have a legal option to force them out – meaning, quite apart from Greece’s internal coordination problems, its rational move is to threaten default and force the rest of the EU, ie Germany, to bail it out, under whatever suitable language and political cover can be found. That does not seem like an irrelevant conclusion to investors.
How you frame that as an investment bet is not completely clear, however. Betting against the euro is consistent with this hypothesis - if it is true that Greece can’t be forced out, and it either defaults or gets bailed out, hard to see that this is not bad for the euro. But now, betting against Greek bonds? If you think Greece will get bailed out, then why bet against them? But maybe you would prefer to see pressure put on Greek bonds in order to drive up the value of your euro-short? The interaction of Greek bond strategies and short-euro strategies makes it hard to see a clear result simply from the surface of Greek bond spreads, looking back to the chart I posted yesterday. Or am I missing something? (End update.)
(Update 3: Financial Times reports today (Wed, Feb 10, 2010) that the pressures downward on the Euro are forcing Berlin to have to fashion a rescue, but that it is trying to build some kind of firewall between it and Greece.)
However, hunting around for Coase Theorem hypotheticals that didn’t involve the standard nuisance and pollution type cases for my 1L law and economics course – pure hypos without transaction costs, then gradually adding transactions costs back in – it occurred to me that I could structure a hypo around this kind of issue.
So ... as the WSJ and FT pointed out in my earlier posts on Greece and the problems of the southern Eurozone as against the northern Eurozone of Germany, the two main options for Greece are
- (i) withdraw from the Euro and devalue; or
- (ii) get a bailout from the Eurozone, which is particularly unpalatable to German voters (but which anyway would come with fiscal requirements that it seems hard to believe that Greece would ever persuade itself to meet).
Is there a way in which Germany and the still solvent part of the Eurozone of the north could bribe Greece to “temporarily” withdraw from the Euro? Reaching an “efficient” solution in which Germany pays less than it otherwise would from a full euro-bailout, but pays something, essentially as a premium for getting Greece out of the euro with all the long term risks that presents.
(Note, from a Coasean perspective, that one of the problems here is not just transaction costs, but apparently the problem that the legal rights are not fully specified. I mean by that in part that it’s not clear (so far as I can tell, I might be wrong) how and whether there are any options for forcing Greece out of the euro, or whether it has an absolute right to stay in or stay in with consequences legally specified or not specified. Maybe all that is somehow spelled out in various Eurozone agreements and directives, and I’ll leave the international banking lawyers to tell me, but I’ve been unable to see something that clearly specifies the legal rights involved.)
I assume there is also a problem of past debts already being denominated in euros. And probably lots of other problems as well. However, explain why, or why not, it would not be in principle a good idea to combine the two options above and have the Eurozone pay to have Greece withdraw. With some kind of politically face-saving explanation about “temporary” or what have you – but still getting out? What and how much (or at least the factors affecting such) would the solvent Eurozone have to pay, and what would be the pressures on that price – I assume the implied costs of the legal rules involved, related to default, forcing Greece out, other things.
Am I right in thinking that someone must already be far, far along the curve in thinking through such possibilities? Can someone point me to published sources? Or is there a reason why this idea is a non-starter? Finally, how would you frame this as a Coasean hypothetical, limited to one paragraph and highly simplified? Or is it somehow not suited to work as a Coase Theorem hypo?
(Update:) Thanks to Dutch international law scholar Martinned in the comments to an earlier post, here is a summary of the relevant rules regarding ‘in’ and ‘out’ of the euro. Two further questions:
- First, does this support the proposition that Greece won’t be bribable because staying in the euro is its best deal?
- Second, does this sufficiently specify the legal rights such that you could create a Coase Theorem hypo based around bargaining by, let’s say for simplicity, Greece and Germany? Even if the result were, Greek default?
Martinned@prof. Anderson: Everything you need to know about countries being kicked out of the Eurozone, leaving unilaterally, etc. is in this ECB working paper from December. In a nutshell, the answer is that it can’t be done. The Treaties are written based on the assumption that all EU member states are members of the Eurozone, and that to the extent that some are not, this is temporary. The idea of going from inside the Eurozone to outside was simply never contemplated. Under the Lisbon Treaty, Greece now has the explicit right to leave the EU as a whole, but there is no way to make a country leave the EU. A country’s voting rights in the Council can be suspended for human rights infractions, and a country can be fined for sins against the stability and growth pact. Those are about the most drastic measures that can be taken.
So nobody can force anybody to do anything. Greece can’t be forced out of the Euro or the EU, and the others can’t be forced to bail Greece out. (At least not legally.) If Greece defaults, that is unfortunate, but the only consequences that would have for the other MS are economic. (i.e. Market panic and other contagion.)