The road not taken by EU for Greece

A good five years into the modern Greek tragedy, it is obvious that reactions and solutions offered so far have been counter-productive at best, disastrous in sad reality. Much has been written on what went wrong, all culpable sides have been blamed and all innocent ones -namely Greek and other European citizens/taxpayers- have been punished for that. But, one would be tempted to ask, what could have been done before the situation got out of hand, as much as it takes to corrode the trust of European citizens in the entire project of the EU?

To start with the easy answers, we Greeks -who bear a great responsibility for this mess we're in- should have known and have acted better, by not voting for the incompetent and/or corrupt governments that perpetrated the crime. And the Brussels/Frankfurt institutions, who's responsibility it was to supervise and restrain member-countries, should have identified the problem long before it reached the point of no easy return. They had the mandate, the know-how (that ordinary citizens can not possibly have) and all the time to do so before the reckless Greek governments borrowed from the reckless banks and financial institutions, sums of money that could never be payed back. Insatiable greed for unrealistic profits was also fuelled by the rating agencies, which nearly till the inevitable bust advised positively, on buying bonds that were in the end worth close to nil.

Fast rewind to early 2010. The € 110 billion first bailout package from EU member states, the ECB and the IMF (in full breach of the European treaties and the IMF's rules) made sure that institutional lenders, mostly German, French and Dutch banks, were given the face value of the Greek bonds in their portfolios. Bonds that already carried a hefty risk premium, in their high interest rate, as compensation for an eventual sovereign default. The second bailout program, two years later, was just the proof that the first one was the wrong medicine.

Let's imagine what would have happened if another route was chosen at that point; if instead of breaching the rules to enforce a bailout for the benefit of the banks and other “investors”, the rules were broken with the aim of fixing the problem. The ECB could have acted as a responsible central bank and through open market operations could have created as much demand for Greek bonds as needed to keep supply on the plus side, but not as high as to lead to default. Draining the market, at prices much lower than face value, would send the right message to reckless lenders: When you do not act responsibly, you have to suffer the repercussions. What could happen at the date due for repayment of these bonds would be also a lever for pressure on the Greek government, for real structural reform (which, by the way, has very little to do with punitive austerity). And with the right amount of drainage, the market rates for non-refinancing debt would be so high, as to oblige the Greek government to responsibly manage public finances but also low enough to avert default.

Europe, aided by the IMF, took another road instead. It chose to brandish billions upon billions of other peoples' monies as an oppressor's yoke, determined to impose ever more austerity, of indeterminate depth and indefinite duration in order to make of Greece a dreadful example.

Would the “positive” scenario have been beneficial to the European Union? Would it have been a hindrance to real structural and institutional reform, such as one only hopes the current Greek government will eventually establish before it is either toppled or it's term expires? It's no use crying over spilled milk, but it could certainly be useful to examine the facts and draw lessons from the mistakes which now threaten the European project.