Alice In Schäuble-Land: Where Rules Mean What Wolfgang Says They Mean

After trying his best to chuck Greece out of the euro last weekend, Germany’s finance minister Schäuble has continued to openly undermine the deal that was agreed by European leaders and endorsed by the Greek parliament. A key argument he has been putting forward is that a debt write-down for Greece “would be incompatible with the currency union’s rules” but that such a write-down would be possible if Greece left the euro.

While this claim is being widely repeated in the German press, the truth is it is really Grade-A concern trolling (“I’d love to help you guys but I can only do it if you leave the euro”) dressed up as legal argumentation.

The rules of the European Union and Eurozone are so byzantine that it is quite easy to make false claims about these rules and get away with it. However, I do not believe there is anything in the European Union or Eurozone rules that would preclude a debt write-down inside the euro.

The No Bailout Clause That Isn’t

The basis for Schäuble’s argument appears to be Article 125.1 of the consolidated treaty on the functioning of the European Union. Here is the article in full.

The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

This is the article that used to be called “the no bailout clause”. However, it is nothing of the sort. It simply says that member states cannot take on the debts of another member state. This did not rule out member states “bailing out” other countries by making loans to them. And indeed, the European Court of Justice in its Pringle decision established that the European Stabilisation Mechanism bailout fund was consistent with Article 125.

Also worth noting about Article 125 are all the things it doesn’t mention. It doesn’t rule out loans being member states and doesn’t discuss these loans being restructured. And it makes no mention whatsoever of the Eurozone. So there is simply no legal basis for the idea that Greek debt being written down is illegal while they remain in the Eurozone but is fine if they leave the euro.

It is conceivable that someone could still take a case to the ECJ objecting to a write-off on the grounds that the granting and write-off of loans to Greece would result in more debt for European countries and allowed Greece to pay off other creditors. So you could argue that this was effectively the same thing as the other member states assuming Greece’s other debt commitments.

To my mind, this line of argumentation moves far away from the simple and clear language of Article 125.1. I also don’t see much in the Pringle decision to suggest the ECJ would uphold such a case. There would be even less case for a legal argument against an “effective write-off” involving postponing interest payments and principal payments for some very long period of time, such as 100 years.

So there is no “Eurozone rule” against a writing off Greek debt. Conversely, despite Schäuble’s enthusiastic support, the rules don’t allow for a euro exit. Rules it appears, mean whatever Mr. Schäuble wants them to mean.

The “Greece Broke the Rules” Meme

Beyond Mr. Schäuble’s selective interpretation of Europe’s rules, there has been a wider commentary in recent weeks implying the necessity of being tough on Greece because it has “broken the rules” of the Eurozone.

For example, former Irish prime minister, John Bruton is a good bellwether for elite European opinion. He wrote an article this week that included the following:

The possibility of Greece leaving the euro, as raised by Germany, has been greeted by some as dealing a blow to the currency — because it supposedly ended the notion of the euro being “irreversible”.
But nothing in political life is irreversible, even if some things do last for a very long time indeed.
“Irreversibility” was always a legal fiction, and fiction is not a sound basis for an economic policy.
The euro is a contingent compromise, where members trade some short-term losses for greater long-term gains. A euro, where rules were easily broken, would not endure.

And here is the Wall Street Journal’s Simon Nixon

Mr. Tsipras has had to accept humiliating terms of surrender. But he brought this upon himself: first, by making wildly incompatible promises — to keep Greece in the eurozone while ending austerity — that he could never hope to keep; and secondly, by the way he has conducted himself over the past six months, showing scant respect for eurozone rules or other governments’ democratic mandates.

Neither Bruton nor Nixon explain which eurozone rules Greece has been breaking that necessitated threats of expulsion. People can point to the under-statements of Greece’s debt that pre-dated the current crisis. But these events are long in the past and did nothing to contribute to the escalation of the current crisis this year. You can also point to the Stability and Growth Pact rules but keep in mind that these are being broken by the majority of euro area members.

Nixon explains the real rule that Tsipras has broken:

Like Italy’s Matteo Renzi, France’s François Hollande and others before him, Mr. Tsipras has had to learn the rules of the European game: that you don’t gain leverage over other leaders simply by winning elections — they have all done that — but by winning their respect by showing you have the capacity to make tough decisions at home.

This gets it about right. The rules that Tsipras has broken are unwritten rules that reflect the power the euro area’s creditor states have to ruin any member states that don’t do as they are ordered. Accepting such a large loan from these states in 2010 was probably the biggest mistake in Greece’s economic history. Indeed, I would bet most Greeks wished now there really had been a no-bailout rule.