EUROPE NEEDS TO KEEP GREECE IN THE EURO ZONE / BARRON´S MAGAZINE

Wall Street's Best Minds

Europe Needs to Keep Greece in Euro Zone

Fiscal toughness will create bigger problems for Europe if it leads to Greek exit from unión.

By Marc Chandler

April 22, 2015

 

There is an element that links the terrible human tragedy in the Mediterranean Sea and the ongoing Greek crisis. It is Europe’s overemphasis on moral hazard.

Moral hazard is the idea that people will act irresponsibly if they do not have to bear the consequences. No doubt, the concept offers valuable insight, up to a point. The problem lies with its excessive reliance.

 

The European Council will hold an extraordinary meeting on Thursday following what appears to be among the most deadly accident in the Mediterranean. Illegal human trafficking has risen in recent years as the political instability in Northern Africa and the Middle East has increased. Unsafe, overcrowded vessels have resulted in thousands of deaths and rising. An estimated 3,500 people died in passage last year though an estimated 219k were successful.

Due to Italy’s proximity and the initial destination of choice, it has taken the lead. However, its Mare Nostrum Operation (October 2013) was expensive (estimated cost 9.5 mln euro a month) and was criticized for offering a near taxi service for refugees. An overcrowded boat, often with no captain, would set sail and then call for help. Italy’s navy would help ensure the safety of the refugees.

However, many European officials argued that the rescues were encouraging the refugees. So they replaced Mare Nostrum with Operation Triton. Minimize rescue efforts in the Mediterranean to discourage such immigration. Estimates suggest Operation Triton costs a third of Mare Nostrum. Don’t make it so easy to cross the Mediterranean by making it more dangerous. Reduce the number of coast guard ships. That will teach them not to expect European countries to save them from the consequences of their own decisions.

In contrast, the U.S. has moved in the opposite direction. It is not that the U.S. immigration policy is not without its flaws and challenges. However, the U.S. has increased its patrol of the U.S.-Mexican borders and has made it much easier for refugees to call for help. Last year the number of Mexicans dying trying to cross into the U.S. fell to 15-year lows (307 in fiscal year 2014 after 445 in FY2013).

This week’s Mediterranean tragedy that has taken the lives of 700-950 people is spurring European officials to rethink their policy. Teaching the lessons of moral hazard is recognized as an inadequate response. Not only will the policy be reformed, but the costs have to be shared. Italy and Malta and Greece cannot bear the financial burdens alone.

The time to teach the refugees that the human traffickers are dangerous is not when they are in the middle of the Mediterranean. The time to teach that playing with matches is dangerous is not while their house is on fire.

The same general point applies to the official creditors stance toward Greece. Greece is guilty purely by being a debtor. After all, in German and Dutch, the word for guilt and debt is the same (schuld). If an ounce of forbearance is shown to Greece, it is feared, profligate behavior will be encouraged. Trying to teach Greece a lesson is taking precedence over facilitating an economic recovery and rehabilitation. It could wreck the larger [European] monetary union.

Understandably, Europe does not want its monetary union to be forged with blood, but it needs to demonstrate its resolve to keep the union together. A Greek exit, intentional or accidental (whatever that really means) would settle the issue for ever more, with serious financial and political repercussions. Moreover, a Greece outside of EMU and the EU would likely create further challenges for Europe, including exacerbating its immigration challenge.

Perhaps the largest deficit in Europe is not about money but in its vision. It cannot see yet that moral hazard is not the end all and be all. It cannot be the sole guiding principle without disastrous outcomes. Greater union is part of the solution to both European migration and Greek challenges. There is little to be achieved in either case with stressing the moral hazards.

With a 25% contraction in the economy and a threefold increase in unemployment, the Greek ship is sinking. Now is not the time to insist on swimming lessons.


Chandler is global head of markets strategy for Brown Brothers Harriman.