It is often said that the measure of a good compromise is that it leaves everyone unhappy. Judged solely against this criterion, the Greek deal was a resounding success.
Alexis Tsipras, the Greek prime minister, quickly popped up on television to say he didn’t believe in the reforms being forced on him in return for the country’s third bail-out and Wolfgang Schäuble, the German finance minister, made no secret of his belief that Greece would be better off taking a “timeout” from the eurozone.
This was a key moment – the first time that a prominent European politician has explicitly raised the possibility of a country dropping out of the euro club and reverting to a national currency. It threatened to undermine the famous commitment made by Mario Draghi, the president of the European Central Bank, in 2012 to do “whatever it takes” to keep the euro together.
The fear is that Schäuble’s euro heresy might tempt the markets to price in so-called re-denomination risk. This could increase borrowing costs for some of the less robust eurozone economies and encourage investors to test the bloc for potential weak spots.
Last month, Benoît Cœuré, a member of the European Central Bank’s executive board, tried to shore up defences. He said the Greek negotiations had “let the evil genie of a country exiting the euro area (even temporarily) out of the bottle” and that he wanted to make it clear that the eurozone is “an irreversible project”.
Cœuré’s view is widely held. But it deserves to be challenged. Should the euro be an irreversible project? Might a potential Grexit (or the exit of any other country for that matter) be, on the contrary, a feature rather than a bug?
One thing is clear: the common currency remains remarkably popular. This spring, 69pc of respondents to a Eurobarometer survey said they were in favour of the euro (just a smidgen less than the highest approval for the currency since the question was first asked in 2004). Only a quarter of those polled were against it.
The question, then, is how the countries in the eurozone can best bolster the currency.
One answer is through greater integration. In June, the European Union’sFive Presidents’ Report (named after the heads of the European Commission, European Central Bank, European Parliament, European Council and Eurogroup) suggested that the eurozone should start building its own financial ministry.
This call has been echoed by French president François Hollande, Italian finance minister Pier Carlo Padoan and Cœuré among others. The idea would be to centralise economic policy, giving the eurozone the necessary firepower and co-ordination to deal with future financial turmoil.
There is just one problem: it’s never gonna happen.
Think about the number of different hoops that would have to be jumped through. First, all the different eurozone governments would have to decide on what powers the new “euro area Treasury” should wield – tricky at the best of times and these aren’t those. Then new European treaties would have to be agreed by not just the eurozone members but the whole European Union. Then the politicians would have to sell the concept to their increasingly eurosceptical electorates.
It’s not even the right answer. As Professor Otmar Issing, the European Central Bank’s first chief economist and one of the founding fathers of the euro, says, control of budgets must be left to the national governments who are genuinely answerable to voters.
Speaking at the Ambrosetti forum of world policymakers on Lake Como last week, he said: “Political union cannot be obtained in the European Union by the back door. It is a violation of the principle of no taxation without representation, and represents a wrong and dangerous approach.”
So, if the present set-up is, by broad agreement, a mess, a eurozone finance ministry without a political mandate would be “dangerous” and the chances of a political union are, again according to Issing, “close to zero”, where does this leave European monetary union?
Needing to make the best of a bad job is the short answer. For one thing, it is hard to imagine the genie of a potential exit being stoppered any time soon. That being the case, why not make a virtue out of a necessity?
It was, after all, the threat of being booted out of the club that persuaded Tsipras to renege on his election promises and accept a deal that was, whatever you think of the specific terms, the country’s only chance of remaining in the eurozone; removing the treat of an exit from the eurozone removes the ultimate incentive to abide by its fiscal rules.
Equally, there was very little sign as Greece’s crunch drew closer of financial contagion spreading to other eurozone countries. Indeed, Syriza’s perceived defeat appears to have also stemmed political contagion with some populist parties like Spain’s Podemos recently losing ground in the polls. It would also prevent countries from claiming they had been denied the right to make democratic choices. Don’t like the rules? Well, there’s the door.
Coupled with the mechanisms to allow countries to default on their debt, the threat of an exit would minimise moral hazard and reintroduce market discipline to the euro. Would it mean that some countries had to pay more to borrow money? Yes. But is that a bad thing?
If this means that over time the eurozone gets whittled down to a hard core of members, as the former German chancellor, Helmut Schmidt, once predicted it would, then perhaps that too is, ultimately, what’s needed to ensure the euro’s survival.