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Greek Debt Crisis: In Defense of Merkel and the EU

Friday, April 30, 2010

At the risk of taking an overly contrarian position on the EU's handling of the Greek debt crisis, I think that there's an argument to be made that the best deal was reached for everyone involved at the soonest possible moment. That it didn't come sooner is a reflection of the institutional and political weaknesses both of the EU and Greece. But I don't think that earlier versions of the bailout plan, which amounted to symbolic signals, would have effectively held off markets.

It's not certain that this one will either, with regard to the risk of contagion in Spain, Portugal, and elsewhere. But that would have been the case with a symbolic signal anyway. And if the deal for a three-year EU-IMF loan guarantee accompanied by real austerity measures in Athens does get finalized, it will at least provide some measure of actual security against the lingering structural aspects of the Greek budgetary crisis. Neither the dimensions of the bailout nor the pain of the austerity cuts were imaginable even a week ago. But both are necessary to address the concrete crisis, as opposed to the image crisis that has resulted.

Merkel's insistence on holding out for tougher Greek austerity measures, while contributing to the image crisis, has resulted in a much more realistic solution to the concrete one. In fact, it could be argued that by contributing to the image crisis, she helped to better address the concrete one.

The political component of this crisis resembles two guys tossed out of a plane with a single parachute, both holding guns to each others' heads demanding the chute, and neither willing to let go of their guns to pull the cord that will save them both. What has now brought both Greece and Germany to their senses is the prospect of imminent impact with the ground. It's a reflection of institutional and political realities that this is what it took for that to happen. But to blame Merkel, or to wrongly claim that Herman van Rompuy and the EU weren't present or visible during the months of negotiations that ultimately led to this, seems offbase. And while the EU makes an easy target, does it really compare that unfavorably with the U.S. decision-making process over the TARP bailout in September and October 2008?

This crisis has been a boon both to Europhiles, who use it to argue that the EU needs to build stronger economic institutions, and to Europhobes, who use it to argue that the EU is a joke. The truth is somewhere in between. Neither the EU nor the euro are out of the woods, but as usual, the union has managed to muddle its way through to a solution in the nick of time.