Europeans’ Thoughts on the Greek Bailout

I’ve been to a few economics conferences in Europe the past few months, and it has given me the opportunity to talk with some European economists about the Greek bailout. I only talked with a few people, and they were all economists, so I wouldn’t generalize to say they are representative, but I did find them interesting.

One Greek I talked with felt that Greece was more or less trapped by circumstances beyond their control. It would have been difficult for them not to join the Eurozone, but now as members, they are not in a position to devalue their currency to escape their liabilities. They could exit the Eurozone (not a good option in his opinion), they could default on their debt obligations (also not a good option), or they could accept an EU bailout, that was coming with strings attached, and greater EU control over Greek fiscal policy (again not a good option, but preferable, in his opinion, to the other two).

I talked with several Germans. One held an advisory position with the German government, and his view was that Germany had to participate in a bailout to prevent contagion, because a default in Greece would lead to downgrades and eventual defaults in other EU countries. But every other German I talked with thought the bailout was a bad idea, and that the problem should be dealt with by Greece, not Germany or the EU.

Why was Germany involved, then? The most common answer was “German guilt.” The Germans still carry collective guilt over WW II, and if they didn’t intervene to support Greece, they would not be acting European. Most Germans I talked with thought that the combination of German guilt and European unity forced Germany to step up, even though they are reluctant to do so.

I talked with a Portuguese economist who thought that the creation of the EU and the Eurozone essentially obligated the larger countries to step up and support the smaller ones. If contagion from Greece’s problems led to a downgrade of Portugal’s debt, Portugal’s interest costs would rise, putting them in more of a financial bind, which would lead to their default. His view was similar to the one German I talked with who was concerned about contagion. His solution was to have the EU issue debt, rather than the individual countries, making everyone’s bonds as solid as Germany’s.

I noted that his solution would turn over some of Portugal’s sovereignty to the EU, and he viewed this as a good thing. It would make Europe even more united. He marveled at how Europe, which for centuries had fought so many destructive wars among themselves, were now more united in peace under the EU, and viewed it as a positive development if Europe became even more united, and if national sovereignty gave way to more of a United States of Europe.

I certainly can’t claim that these views of a few individuals are representative of their countries. They are all academic economists, and I doubt economists’ views are representative anywhere. But these different impressions are interesting: the Greek view that the country is a victim of circumstances beyond their control; the German view that because they are a part of greater Europe they have to support Greece, despite being reluctant to do so; and the Portuguese view that a sacrifice of national sovereignty for greater European unity is a good thing.

I did “joke” with some Germans (I put “joke” in quotation marks because I see some truth in it) that although they failed to take over Europe in WW II, now they are finally doing so through their control of EU fiscal policy within the European Union. The Germans strenuously objected to that comment. I took their objections to be another manifestation of that German guilt.