Triple hazard

Euro zone moral hazard: Moral hazard is the clue to solving the euro crisis. The idea that entities don’t learn lessons unless they feel pain is valid in the euro zone — but only if the blame is shared properly. The mess isn’t just the responsibility of profligate Greeks, but also of foolish banks and hypocritical Germans and French. Each needs to suffer.

One of the main reasons the region’s financial crisis is so intractable — with endless wrangling over what is the best way forward — is because the different players haven’t fessed up to their own sins. There is therefore a tendency to proclaim their own virtue and pin the blame on others. This makes it hard to come up with a fair settlement.

The main fault line is over whether it is the borrowers (Portugal and Ireland, as well as Greece) who were to blame or the lenders. If, like the German tabloid press, one thinks that it is just the borrowers’ fault, the natural remedy is to crack down on them by imposing stringent austerity programmes in return for bailouts. If one is too lax, they will sin again.

But the lenders were also foolish. That’s something the population in peripheral countries, especially Ireland, increasingly appreciates. Germany and France, though, whose banks are exposed to the euro zone periphery, haven’t faced up to this truth. This causes its own moral hazard: unless banks suffer write-downs as a result of debt restructuring, how can they be expected to learn the appropriate lessons?

Moral hazard also has a third dimension: the hypocrisy of the big, rich countries. Germany and France were responsible for undermining fiscal discipline early in the millennium by breaking the Maastricht Treaty’s rules on borrowing. It is therefore appropriate that they should suffer, too, largely through making more cheap loans to Greece and other struggling countries.

A combination of more austerity, haircuts for creditors and further soft loans from rich countries will probably be what eventually solves the euro zone crisis. But the region would get there faster if everybody admitted their own guilt.