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Is the European safety mechanism a waste of time?

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The latest S&P downgrade of the Greek credit rating raises among many others one essential question: Is the European safety mechanism a waste of time? Since the situation in Greece is getting worse, even though the country has practically transfered all of its economic policy competences to the troika (EU, IMF, ECB) by signing the memorandum more than a year ago.

To provide a satisfactory answer we need to put the issue of the Greek debt crisis in its proper context as the situation is in many ways unique. We first need to look at the parties that are involved. On the one side we have Greece who has a sovereign debt that might well prove to be non-sustainable, a debt that is considered by many, including myself, as odious; and on the other hand we have the creditors who are in their majority German banks (with Deutsche Bank being the most prominent), followed by French banks.

These parties engage in the situation under some very specific economic realities. Firstly the case of Greece is by all means sui generis (a category on its own) as it combines a debt crisis with a rigid monetary policy, which is formulated in parallel and even in contradiction to the country’s needs, since it is the single European currency, the euro, which is handled by the European Central Bank and no one can shape its decision-making. All this within a global economic crisis. In other words the case of Greece blends many different problems that require separate approaches, into a single scenario. Greece has an over-appreciated currency, which decreases its already crippled competitiveness, it has no power to depreciate it; its economy currently witnesses an extremely rigid, inelastic money supply that cannot be stimulated by monetary policy mechanisms as those are controlled by the ECB. Furthermore it cannot borrow money to cover this lack of liquidity, since the markets do not trust its ability to pay back because of the extraorbitant sovereign debt. In a nutshell Greece is in a really complex situation, whereby the only way out is to declare default on its creditors and concentrate on ways of achieving self-sustainment.

The case of a default would go directly against the vital interests of the creditors who, as I already said, are primarily German and French, since it would cause a chain effect, breaking the euro apart and putting everyone, especially the European center into serious troubles. This catastrophic scenario seems enough to answer the question whether the safety mechanism is a waste of time, as in its absence the Europe-wide effect of the Greek crisis would have been immensely unpleasant. Hence from the perspective of the creditors who see their economic well-being threatened by a Greek bankruptcy, the safety mechanism is essential and they will do whatever it takes to sustain it, at least in an attempt to decrease the default costs.

On the flipside, Greece is in fact losing out of the safety mechanism in the way it has been established and within the economic realities it takes place. The safety mechanism would have been extremely helpful, had it been accompanied by a temporary re-introduction of the drachma, together with the nationalization of certain private banks in order to gain control of the money supply. Moreover the bailout money of the mechanism would have been extremely useful if they could be directed to the purchase of Greek bonds from the secondary market so as to reduce the overall debt, easing the burden of the strict austerity measures.

With today’s conditions, with the bailout structure being as it is, with the creditors being who they are, the safety mechanism is a complete waste of time if its goal was to save Greece for going bankrupt. However judging for the way everything functions, the goal was never to save Greece, it always was to save the creditors and consequently the euro.

Thus the answer to the initial question is that the safety mechanism is an investment for the creditors so they are very positive to it, but it is a complete waste of time for the revitalization of the Greek economy as it only succeeds in worsening the recession, something which is depicted in the latest S&P evaluation.