Timothy Geithner’s idea on solution to Greece gains currency

“A Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.”

This is an account by the then US Treasury Secretary Timothy Geithner of his conversation with German finance minister Wolfgang Schaeuble exactly three years ago, as recounted in his book covering the four years when the US and global economies were battling one of their worst ever crises.

Over the weekend, this same idea but now much nearer to becoming a reality was echoed in the one-page document presented to the eurozone finance ministers by Schaeuble — an idea that has deeply divided the 19 countries that use the currency.

It went one step further however than Schaeuble’s conversation over lunch with Geithner, presenting a choice to Greece that if the country accepted, would completely change the relationship between eurozone countries, and bring it further along the ‘Old Testament’ approach that Mr Geithner identified as aggravating the crisis for Europe and the US.

There were two avenues open to Greece now, according to his eight-paragraph statement that was said to have the agreement of Schaeuble’s chancellor Angela Merkel and her junior coalition partner Sigmar Gabriel, head of the Social Democrat party, and which was presented to the eurozone finance ministers in Brussels on Saturday.

Greece should transfer valuable assets, €50bn, to an external fund like the Institution for Growth for Greece, based in Luxembourg, to be privatised over time and decrease debt; capacity-building and depoliticising Greek administrative tasks under auspices of the commission for proper implementation of the programme; automatic spending cuts in case of missing deficit targets.

However, if these conditions could not be delivered upfront, Greece should be offered swift negotiations on a time-out from the eurozone, with possible debt restructuring over at least the next five years.

It would be accompanied by growth-enhancing, humanitarian and technical assistance over the next few years.

And it would be accompanied by streamlining of all pillars of the Economic and Monetary Union and concrete measures to strengthen the governance of the eurozone — assuming that all the other 18 eurozone countries are sufficiently scared of being made to sit on the step to take time-out from the eurozone.

While this could be interpreted as Schaeuble giving vent to one of his obsessions, the fact that all this, and much more, turned up in the four-page document discussed and agreed by the eurozone finance ministers yesterday gives it a different weight.

They did not agree every word. They left seven issues with a question mark for the prime ministers of the eurozone countries to deal with at their summit last night.

However, the overall effect is that Greece is being offered a bailout on condition that it hands the functions of government and parliament to the European Commission, under the control of the eurozone finance ministers.

The reason given for such draconian action, for which there is no precedent or authority in the EU treaties, is that Greece has forfeited all trust and they must rebuild it. There is little doubt but that Greece did not transform its country from a clientelist and corrupt state over the past five years, and it is also true that the troika made lots of mistakes while the EU’s approach to the crisis generally has not proved particularly successful either.

After leaving a finance minister in charge for five months who was suspected of representing the interests of hedge funds and others, and a prime minister with no experience of government or the EU, it exasperated the patience of those who have perhaps been too long in the driving seat, like Schaeuble.

Much of the approach of the Syriza government was attributed to its political and economic philosophy being the most left wing in the EU, and the incredibly powerful European People’s Party of which Merkel’s party and Fine Gael is a member, decided they had to go.

If the Greeks do not reject the conditions for the eurozone to consider giving them a third bailout, it will create a strange new precedent for which there is no legal basis, but is designed to ensure that all countries adhere to the mainly German economics doctrine that Geithner found “terrifying”.

“Letting go of Greece could create a spectacular crisis of confidence, regardless of what Europeans committed to do afterward,” he warned.