Germany is hard set against a transfer union, yet that is exactly what circumstances are forcing on the Euro area. Any debt relief to Greece makes it a transfer union by the backdoor. Money is first lent to Greece because Greece needs financial assistance to compete alongside Germany in the same currency. The debt builds up. Greece cannot repay it. So some of it is cancelled, retired, rephased. To anyone other than the German government that is a transfer union.
Germany cavils on fine definitions. If, they say, we simply prolong the loan, the debt can still be honoured. If we allow Greece to pay little or no interest on the loan for a bit, the debt is still intact. As far as markets are concerned, a debt not paying interest is worth a lot less than a debt with interest on time, and a debt repayable tomorrow is a lot more valuable than one repayable in 50 years time. You can’t get away from the fact that any diminution in interest payments and any extension of the loan has a free gift element to Greece, which is a kind of transfer union.
The IMF’s intervention into the Greek debate is at once electrifying and very unhelpful from the German point of view. I have been a longstanding critic of the IMF lending anything to a Eurozone member state. I pointed out that the IMF should only lend to countries with full powers over money, interest rates and budgets. IMF austerity measures in the public sector have to go alongside easier money and private sector led expansion to enable economic recovery to take place. This cannot happen in Euro area countries with no currency, no independent interest rates and no independent commercial banking system. The result is mass unemployment, lower incomes and often long and deep recessions. The IMF’s statement that Greece needs a debt write off is an admission of IMF failure, acknowledging that the IMF has lent to a country that cannot repay it all, and accepting that the IMF has to take a hit.
Which leads me to ask, why would the IMF want the Europeans and the IMF itself to lend more on a similar basis to last time, when last time’s loans failed to promote recovery and have ended in disaster? Is the IMF proud of its work in Greece so far, or will it now accept some responsibility and realise its clumsy interventions delayed sorting out the underlying problems?
The IMF is at last more realistic in saying that the current plans leave Greece unlikely to recover and succeed. They are saying that there needs to be transfers of cash from the rest of the zone to Greece to help. That pits them directly against Germany, delays a settlement, and means yet more misery and recession for Greece.
It is a true tragedy. Not only do the creditors and the debtor still violently disagree, but now two of the leading creditors have fallen out. Who said there was now a solution to the Greek crisis? Why did people think there was an agreement that will work?
There are only two long term answers. Either Greece leaves the Euro and establishes her own banking and currency system, or she is fully absorbed into a Euro political union and receives large transfers of cash from the richer parts of the zone in return for being told what to do.