Greek Debt Crisis: Third Time’s a Charm?

The EU once again agreed to support Greece in a vaguely outlined but yet-to-be-determined way. I’ve actually lost track of how many symbollic expressions of support that makes, but three sounds right. This time, however, not only did German Chancellor Angela Merkel win out on her insistence to include the IMF in any eventual bailout, she also managed to hold on to a future veto for actually implementing the agreed-upon mechanism. What’s more, she got a commitment in writing to explore ways of strengthening oversight of EU member states’ budgetary discipline, which is being described as “economic governance,” but represents only part — the German part, that is — of the kind of authority the union requires to fully rationalize and harmonize its fiscal and monetary policies.

For this she has paid a high cost in terms of isolating Germany within the union. Europhiles see it as the victory of petty politics over grand visions of European integration, and they’re not wrong. Facing a crucial regional election back home, Merkel held out the way she did due to German popular opposition to any financing of Greek profligacy. French President Nicolas Sarkozy ended up turning necessity into a virtue by accepting IMF involvement to get Germany on board for a mostly European solution. But his initial opposition to IMF involvement was also determined by domestic politics, in this case, the fact that IMF head Dominique Strauss-Kahn is shaping up to be a potential presidential rival in 2012 elections.

For Europhiles, the potential involvement of the IMF is also seen as a symbollic defeat, sending the message that Europe is not up to saving the euro on its own, as well as a strategic one, in that once involved, the Washington-dominated institution would have a de facto say in the budgetary decisions of an EU and euro-zone country.

Nevertheless, the latest agreement is true to the European model of pragmatism over theology. It involves a guarantee of roughly $30 billion (the figure varies according to the reporting) in loans of last resort, of which two-thirds would be in the form of bilateral loans from euro-zone states — organized by the European Commission and at market rates — and one-third from the IMF. Outside of the need for another unanimous decision by the Eurogroup to implement the loans, no formal triggering mechanism was identified.

Clearly it’s a less than perfect solution that raises as many questions as it answers, even if everyone is rushing to salute it as a masterpiece of diplomacy. But what’s important to keep in mind is that this is the financial equivalent of NATO’s Article 5 guarantee: a mutual defense pact that acts as a deterrent (in this case against predatory markets), but that is articulated in the hopes of never putting it to use.

As such, it reflects where Europe is, even if that disappoints those who have strong feelings about where Europe should be. And for the time being, in both military defense and financial defense, an element of U.S. underwriting is still necessary.