Thursday, February 18, 2010

My Big Fat Greek Op-Ed

The Wall Street Journal published my op-ed on the Greek bailout today. Here's an extract:
The details might still be uncertain, but the European Union appears determined to bail out Greece. The problem, though, is that such a move would be illegal.

To be sure, Greece needs help to prevent the contagion of sovereign-default risk to the other euro-zone countries with special borrowing needs—commonly referred to as PIIGS (Portugal, Ireland, Italy, Greece, and Spain). But the EU should not and cannot be the knight in shining armor. That role belongs to the IMF.

The Treaty of the European Union makes it illegal for the EU as a whole and for individual member states to come to the rescue of EU countries in financial trouble. Article 125 clearly says that the "Union shall not be liable for or assume the commitments of central governments . . . or public undertakings of any member state." Likewise, "a member state shall not be liable for or assume the commitments of central governments . . . of another member state" In order to prevent moral hazard, the treaty unequivocally rejects any wealth transfers to reward the spendthrifts.

Proponents of a bail-out for Greece, though, point to article 122 as the legal justification for the EU to act.

Read the full article here. In the original draft, I had also pointed out that article 123 presents difficulties for those who support a bailout. That provision states:
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
Previous blog posts on the Greek crisis can be found here, here and here.