The third Greek bailout has now been approved, despite the objections of Germany's finance minister Wolfgang Schäuble.
The heavily indebted country and its creditors last week agreed on €86 billion ($95 billion) in additional aid for Athens to be extended over a period of three years. This third aid package is about half the size of Greece's gross domestic product in 2014. In return, the country has agreed – once again – to implement extensive structural reforms.
Time was of the essence in sealing the deal, because Greece is scheduled to make a €3.2-billion loan repayment to the European Central Bank on Thursday.
Whether the new program will truly rescue the country is questionable. Greece and its rescuers face what one might call a "trilemma." They have three options, none of which promises to be a true success: the Keynesian model, the supply-oriented model and what might be called the "Merkelian" option after the German chancellor, Angela Merkel.
The Keynesian strategy, based on prescriptions from supporters of British economist John Maynard Keynes, would provide for debt forgiveness in combination with a massive, debt-financed investment program. The goal is to help the economy grow out of unemployment, while public finances are to be consolidated through rising tax revenues and declining welfare spending.
It is doubtful that this treatment promises lasting results, because it would also formally eliminate the euro zone's no-bailout clause for Greece. The funds would be a gift, at least from the government's perspective. The necessary real devaluation of prices and wages would be limited, and national productivity would still be insufficient to handle the level of consumption.
Although the social consequences of the country's economic weakness would be softened, its causes would not be eliminated.
If the monetary union is to be preserved in the long term, European governments will have to use these three years to correct the euro's design flaws.
German economists in particular, including Finance Minister Wolfgang Schäuble, instead put their faith in the power of market laws and see the conditions of supply as the key controlling variable. Flexible wages, an employment and growth-friendly tax and social security system, the deregulation of markets, a small national debt, privatization and a reduction in the size of the public sector are the most promising paths toward full employment and growth, they argue.
Given this, their response to Greece's problems is a Grexit. A devaluation of the Greek currency would make exports cheaper and imports more expensive. This would give a strong boost to agriculture and tourism, as well as all industry, and the country would soon regain its economic bearings.
This sounds convincing. But the argument that Greece could rehabilitate its economy more quickly, easily and painlessly with its own currency, which would be substantially devalued against the euro, is neither theoretically compelling nor supported by facts. Instead, this recommendation is based on firm convictions.
It is interesting that Hans-Werner Sinn, president of the Ifo Institute for Economic Research, who vehemently supports Greece leaving the euro, is nevertheless calling for German transfer payments to Greece "to combat the humanitarian catastrophe" in the event of a "Grexit."
Finally, there is a continuation of the current "Merkel therapy" for Greece: a mix of refinancing, consolidation and structural reforms. This approach comes with a healthy dose of faith, since the facts suggest it is highly likely that by 2018, Greece will still not be self-sufficient and will then need a fourth aid program.
The majority of Germans, opinion polls show, do not support Chancellor Angela Merkel's approach. It is unlikely that the chancellor, if she is still in office in 2018, will want to compel a majority for yet another aid package.
If Europe's monetary union is to be preserved in the long term, European governments will have to use these three years to correct the euro's design flaws. Three issues must be quickly addressed so that growing economic heterogeneity on the continent does not turn into a possible euro explosion.
First, the European Union's banking union, which was launched in November of last year, must amount to more than joint oversight of Europe's banks. Instead, it must include joint deposit insurance regulations, a joint resolution mechanism and uniform rules for bailouts.
Second, an institution should be established that has the power to correctively intervene in the national budgets of all euro members, in case newly strengthened fiscal rules are violated. Third, a shared unemployment insurance system should be established so that employment shocks in individual countries can be offset by the community as a whole.
Each issue alone is already a tall order, because they would all cost a lot of money and interfere in the (budgetary) sovereignty of individual parliaments.
But the European Monetary Union threatens to collapse unless the euro zone manages to more effectively integrate economic and fiscal policy in the coming years. If that happened, the euro would become another link in the chain of failed European monetary unions.
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