I don't speak German, so I don't know how the translation went, but it sounds great to me:
Die jüngste Griechenland-Krise rückt das größte Strukturproblem des Euro in den Vordergrund: Unter dem Dach einer gemeinsamen Währung müssen Staaten genauso wie Firmen pleitegehen können. Banken müssen international offen sein, sie dürfen nicht vollgepackt sein mit den Schuldtiteln lokaler Regierungen. So war der Euro ursprünglich konzipiert. Leider haben Europas Politiker die erste Prämisse vergessen und sind zur zweiten gar nicht erst vorgedrungen. Jetzt ist es Zeit, beides in Angriff zu nehmen....The English version:
Greek Lessons for a Healthy Euro
The most recent Greek crisis brings to the foreground the main structural problem of the euro: Under a common currency sovereigns must default just like corporations default. And banks must be open internationally, not stuffed with local governments’ debts.
This is how the euro was initially conceived. Alas, europe’s leaders forgot about the first and never got around to the second. It’s time to fix both.
If Volkswagen defaults on its debts and goes bankrupt, nobody dreams that it therefore has to leave the euro zone and start paying its workers in Volkswagen marks. In a currency union, governments cannot print their way out of trouble, so they are just like companies.
When Greece got in to trouble, the first bailout went to the German and French banks who had bought lots of Greek debt. Those debts were all transferred to official holders, meaning, indirectly the German taxpayer.
Why, with the 2008 financial crisis already in the rear view mirror, were European banks — too big to fail, apparently — allowed to load up on Greek debt, to the point that they had to be bailed out? Why did europe’s bank regulators let banks hold sovereign debt as a risk free asset?
The problem has only gotten worse. Greek banks are stuffed with Greek government debt. That’s why there was a run. Greeks, knowing their banks will fail if the government defaults, rush to get money out. They have stopped paying their mortgages, as they have stopped paying taxes, and stopped paying each other. The economy is plummeting. Even with the banks now supposedly open, capital controls remain in place so Greeks cannot pay for imports. And savvy Greeks know there is still a chance of Grexit, deal failure, depositor “bail-ins,” and tightened capital controls. They would be fools to put money back in banks.
A modern economy cannot function without banks. Greece will not restart its economy, restart its tax collections, and restart any hope of paying its debts without completely open and trustworthy banks.
Banking across Europe should be open, and divorced from local government debt. A Greek should be able to put his or her euros in a pan-european bank, whose assets are diversified across Europe and will not even hiccup if Greece’s government defaults. A Greek business should be able to borrow from the same bank, whose deposits come from all over Europe. If a Greek bank fails, any European bank should be able to come in and operate it the next morning. And the Greek government should have no right to grab deposits, force banks to buy its debts, or change the currency of those deposits.
If this had been the case, there would have been no run. The Greek economy would not have collapsed. And then Europe could have been a lot tougher with the Greek government about repayment.
This is how the United States works. When states and cities in the U.S. default — such as Detroit, Puerto Rico, or, possibly Illinois — there is no run on the banks, and banks do not fail or close. Why? Because nobody dreams that defaulting states or cities must secede from the dollar zone and invent a new currency. State and city governments cannot force state banks to lend them money, and cannot grab or redenominate deposits. Americans can easily put money in Federally chartered, nationally diversified banks that are immune from state and local government defaults.
As a result, when one of our state governments gets in fiscal trouble, nobody thinks they need to rush to their bank to get their money out, there is no “contagion,” and much less pressure for bailouts.
This was how the euro was supposed to be set up. Many economists have been warning about it for years. But governments like to use their banks as piggy banks, and it never happened.
Greece is not the end. Italian and Spanish banks are just as loaded up with their governments’ debts, and just as prone to a run. There is time to de-fuse this bomb slowly, but that time will run out.
Sovereign default without exit and open banking are the key requirements for the european currency union. A currency union does not need “fiscal union.” The US did not bail out the city of Detroit, or states when they failed. A currency union does not require similar economies. Panama uses the US dollar. A currency union does not need countries to have similar cultures, values, economic development, or productivity. A currency union does not need political union. Europe used gold as the common currency for centuries, centuries when Kings defaulted frequently.
Many people say that small countries need their own currencies, so they can artfully devalue. But a century’s worth of devaluations and inflations did not produce a Greek growth miracle. There is no exchange rate at which Greece’s government workers will start exporting Porsches to Stuttgart. Rather, it was binding themselves to the euro that produced a boom, only sadly wasted.
Greece off the euro will be a disaster. Drachmas will surely not be convertible, so Greece will end up like Cuba or Venezuela, with government workers and pensioners paid in worthless local currency, and everyone who can get paper euros operating on a cash basis. No efficient large businesses can work in such an economy. Greece’s only hope is to liberalize its economy, open to Europe, grow strongly, and pay back its debts.
The euro is a great and worthy project, and a necessary precursor to healthy open economies in small countries of a globalized world. It’s time to finish building it as originally conceived, not turn it into a bailout union.
Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University.
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