A German proposal to tie Greece’s future with a pledge to never default looks barmy. The euro zone already has a hard time getting Greece to reform its economy, partly because the latter can wield the threat of a messy default. When Athens reaches a primary Budget surplus, as it should this year, it will be in an even stronger negotiating position and could default on bailout loans and still pay for government expenses.
Germany has come up with the idea of forcing Greece to prioritise international debt repayment over domestic bills. The euro zone would then be assured it would get its money back. This, in turn, would make it more credible in pressuring Greece into speedier reforms, since the Greeks would feel the pain of non-compliance.
In a way, the German proposals are already a reality. Greece is delaying payment on euro 6.5 bn of domestic bills, such as payments to civil servants, while honouring, so far, its international obligations.
But, there is a limit to how far the Greeks can subordinate themselves to foreign lenders. And, there seems to be little legal basis for prioritising international creditors. Even if Greece were to pass a law enshrining the obligation to service debts above all other payments in its constitution — as Germany seems to wish — nothing could stop Parliament from changing the law later.
No international court has the authority to force a country to pay its debts. Even the International Monetary Fund’s preferred creditor status is based on a gentleman’s agreement. Greek taxpayers may put up with arrears on some payments, but it would be politically untenable to subordinate these to all international creditors over the long term. Even after the euro 200-billion swap with private sector bondholders — currently being negotiated — Greek debt may need to be written down. If German plans came to fruition, membership of the euro zone could amount to economic helotism.
By presenting the Greeks with such an unpalatable and unrealistic option, the Germans may have wanted to force Greek politicians into a stronger commitment to reform. But, such posturing will mostly give Greek anti-euro sentiment an extra nudge.
