Jagdish Bhagwati: Globalization Has a Human Face

The tragedy in Greece is out of character. It is premature: Dionysia, the traditional festival that is popular for its performance of Greek tragedies, is at the end of March. Besides, a Greek tragedy brings a great figure down, thanks to his own mistaken action. But here, the Greek mistakes on fiscal policy are bringing down the euro, and distressing the big European players, Germany and France.

In the ultimate analysis, of course, the bigger EU nations that masterminded the euro are not entirely blameless: They overlooked the fragility of a common currency if a tight control of fiscal policy is not accompanied by a zealous monitoring system. We all know that several German economists predicted what has just happened; and that a fiscally handicapped nation like Greece would bust the fiscal discipline, and then threaten the euro.

With the milk spilt, however, the overriding question that is keeping the EU, most economists, and all the media busy is: What can the EU do?

There is no dearth of unworkable prescriptions. For example, the American economist Martin Feldstein, often very perceptive, has suggested in the Financial Times that Greece should be allowed to opt out of the euro, set its house in order, and then be allowed to re-join the euro. Unfortunately, this is not like sending a naughty student into the corner and then letting him return to his desk later. There would be huge transactions costs, and attending disruptions, in making the currency changes.  

But should the EU step in with support funds, while imposing draconian fiscal conditionality that it deems is in order? There are two reasons why this would be imprudent. The EU can be sure that Greek populist anger will be directed at the EU for the austerity that the EU would impose. Equally, Germany (if not France, as well) will find that its citizens will object to the EU funds transfers to Greece to ease the transition to necessary fiscal prudence: In contrast with the frugal Germans, the Greeks treat themselves better on issues like retirement age and pensions.

The only sensible solution, therefore, is for the EU to have Greece turn to the IMF for liquidity assistance, and for the IMF to impose the necessary fiscal conditionality. The fact that Greece is part of the euro does not require that the EU assume the role of the IMF for EU members. When an IMF member nation finds itself in a crisis, like the one Greece has brought upon itself, it can turn to the IMF for help. Let the IMF do its job, take the opprobrium of imposing conditionality as it often does, and bring Greece back into fiscal responsibility. This may not please President Sarkozy who cynically remarked that he would rather use German funds to finance Greece and bring glory to France. However, another distinguished Frenchman, Mr. Strauss-Kahn, managing director of the IMF, would be glad to have yet another client.