The game of chicken over Greece’s finances (bailout or no bailout) continues, with the European Central Bank’s former chief economist weighing in on the controversy in the FT – and doing his best to make the “German” case:

By joining Emu, a country accepts its rules. Greece, moreover, also knew that adopting a stable currency that was not controlled by its own central bank implied a total break with the past. Devaluation of the national currency and an inflationary monetary policy were no longer options. A single monetary policy is implemented by the European Central Bank and it is the responsibility of each country to adjust its economic policies so that this one size fits all.
Participation in Emu brings huge advantages. The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years. Bailing out Greece would reward such behaviour and create moral hazard of a dimension hardly seen before. In this context, one conclusion becomes obvious: financial assistance for countries that violated the terms of their participation in Emu would be a major blow for the credibility of the whole framework. By its construction, Emu is a “no transfers” community of sovereign states. Transferring taxpayers’ money from countries that obeyed the rules to those that violated them would create hostility towards Brussels and between euro area countries. Among ordinary people, it would undermine a badly needed sense of identification with the great project of European integration.

I’ll ignore the propaganda (“the great project of European integration”) and the reality that “ordinary people” have little interest and less affection for that great project, to focus on the fact that Issing has no answer for the key question: How will the dysfunctional Greek state, a state that obviously had no business signing up for the euro in the first place yet was accepted, simultaneously slash spending, increase taxes, clean up corruption, and do something about remarkably widespread tax evasion (a key element in the current budgetary crisis), all in a climate of collapsing domestic demand and fragile political cohesion?

The best guess continues to be that some sort of bail-out is coming, in which case the debate will revolve around the terms. That makes these comments (also in the FT) from Tommaso Padoa-Schioppa, another former ECB high-up, well worth noting:

Those who argued against it then on the grounds that “there can that there could be no monetary union without political union” are precisely those who should welcome political union now that it finally knocks at the door claiming its rights.

That, of course, is dead right and spectacularly wrong. The people who advanced that argument were, for the most part, euroskeptics. They did indeed argue that monetary union could not work without much closer poltical union, but they then went on to say that that was a key reason why monetary union should be avoided. The obvious suspicion must be that at least some of those who nevertheless rammed through the single currency did so in the knowledge that there would be a crisis — and that that crisis would make the case for political union. And that case is clearly now being made. Here’s Padoa-Schioppa again:

Action is required; but what kind of action? It could range from exerting pressure, to providing liquidity assistance, to lending money, to making gifts. Everywhere in this crisis – virtuous countries are no exception – we have seen good and bad policy. The bottom line is that Greece should receive support, but no gifts. The EU has been appropriately vague on the type of action it would take. Any delicate negotiation involves a degree of ambiguity, whether we like it or not. Otherwise, public opinion, labour unions, competing political parties and patriotism can all too easily become inflamed. What should be made clear to the public is that no country has full sovereignty any longer.