Use the Greek Debt Crisis to Dismantle the Eurozone

NEW YORK (Real Money) -- Understandably, everybody in the eurozone is a bit upset right now. They all blame each other. But nobody seems to want to discuss this issue: the Greek debt crisis is an opportunity, not a tragedy. It's an opportunity for the politicians and the people in the eurozone and in the European Union to clearly decide what they want to do.

It all boils down to politics, really. Back in 2010, Greece was saved for political reasons, with a bailout package worth 110 billion euros ($122 billion). It was saved again in 2012, getting another 130 billion euros. At the time, private creditors were forced to take a haircut of more than 50% on their holdings of Greek debt, along with extended maturities and lower interest rates. The past six months have shown that the kind of politics that had made those bailouts possible has disappeared.

The Greeks blame the creditors, saying they themselves did all they could to save the negotiations, although Prime Minister Alexis Tsipras stood up and walked out the door last Friday, promising to submit the European proposals to a referendum back home.

Just imagine a Greek shepherd, in between milking his ewes and goats and preparing that delicious feta cheese, taking a look at the list of prior actions that the country's creditors had asked Greece to do, in order to make up his mind on how to vote in the referendum.

The Greek shepherd would have to be at ease with notions such as "medium-term fiscal strategy" or "decompressing the wage distribution across the wage spectrum," and ponder carefully whether it is a good idea to adopt "a holistic NPL resolution strategy, prepared with the help of a strategic consultant."

What sort of politician, having been elected by his people to deal with bailout negotiations, throws responsibility for a complex, technical deal back to the people in the 11th hour of talks that are so important for the country's economy that breaking them off leads to imposing capital controls?

In any case, it looks like the Greeks will vote to remain in the eurozone and agree with the package -- even if not many will understand all its details -- so it seems that Tsipras' move has made the situation worse, rather than better, as it is not in agreement with what his compatriots want.

Source: RBS research.

Then there's the simple fact that the current bailout expires tomorrow and it is unclear whether the offer by the Troika that the Greeks supposedly have to approve next Sunday will still be on the table.

On the other side of the negotiation table we had the eurozone creditors and the International Monetary Fund (the latter reluctantly dragged into bailing out Greece not necessarily because of the funds it can provide, but for the technical advice it could give). The creditors weren't behaving much better either.

Having witnessed Greece sinking into depression and the Greek people becoming poorer and poorer (arguably not as poor as other nations in the EU, but still, the Greeks took a huge hit during the financial crisis and it was made much worse by austerity policies), the creditors were unable to come up with politically acceptable solutions for the country.

And this, actually, has been the source of the problem: lack of political will.

The single currency is a flawed monetary union, with only one-and-a-half pillars of the minimum three that are needed for a currency to run smoothly: monetary, banking and fiscal union. The only glue that holds it together is political will.

Spooked by the debt crisis, politicians in the eurozone have put in place the basis of a banking union by giving the European Central Bank the power to be the single supervisor for the banks in the euro area and by creating a common resolution and recovery mechanism.

But they did not go all the way to create a common deposit protection fund like the FDIC in the U.S., leaving it up to national deposit protection schemes to protect depositors in the case of bank failures.

On the fiscal front, things are even more muddled. There is a unique, one-size-fits-all monetary policy in the eurozone, but there are 19 different fiscal ones. Each country has its own tax system, level of income and corporate tax and various exemptions and levels of indirect taxes such as value-added tax.

Both banking and fiscal union are needed for the euro to become a real currency union. Both are unlikely to be achieved any time soon, despite pleas by policymakers such as ECB President Mario Draghi.

A big part of Greece's problems come from this lack of coordination of the eurozone members' banking and fiscal systems; the country would not have been able to run the deficits it has if it had been part of a unified fiscal system.

But huge political will is needed to bring about a comprehensive fiscal and banking union, much more than what would have been needed to reach an agreement on extending the Greek bailout.

For investors, this crisis should serve as an eye opener. If politicians cannot muster up the will for an agreement on the Greek bailout, what does this say about the future of the eurozone?

It should be obvious by now that there is no hope of ever reaching a fiscal and banking union to complete the single currency. In which case, perhaps the best use of the Greek crisis would be to serve as a catalyst for politicians to find ways to dismantle the eurozone with the least damage.

Editor's Note: This article was originally published at 10:50 a.m. EDT on Real Money on June 29.

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