A. Orphanides: "The euro area crisis five years after the original sin" : (pdf)

file:///C:/Users/meown/Downloads/SSRN-id2676103.pdf

Abstract

Why did Europe fail to manage the euro area crisis and what lessons can be drawn from this failure for Europe’s future? Studying the EU/IMF program that was imposed on Greece in May 2010—the original sin of the crisis—highlights both the nature of the problem and the difficulty in resolving it. The mismanagement can be traced to the flawed political structure of the euro area that permitted governments of some member states to exploit problems in other member states that share the common currency. Undue influence of key euro area governments compromised the IMF’s role to the detriment of other member states and the euro area as a whole. Rather than help Greece, the May 2010 program was designed to protect specific political and financial interests in other member states. The ease with which the euro was exploited to shift losses from one member state to another and the absence of a corrective mechanism render the current framework unsustainable. In its current form, the euro poses a threat to the European project

Dan Davies comments

What Greece needed was current period, front-loaded financing for its primary deficit. And that’s what it got, in amounts which were totally unprecedented apart from the Marshall Plan.

It actually needed even more than it got, and an analysis of why the program was inadequate would be very interesting, if anyone would ever stop going on about debt/GDP ratios and write one. But the reason why it didn’t get adequate fiscal financing doesn’t look to me like something that can be blamed on the Euroland sovereigns overruling the poor Cassandra-like IMF. The IMF’s fiscal consolidation targets were the part of the 2010 program which everybody, wrongly, agreed on. If the idea is that creating a second banking crisis in Euroland would have made it more possible for the troika to lend money up front, this needs to be argued for. Orphanides doesn’t even assume this; he just shows a graph of the primary balance adjustment and its consequences, then goes away talking about the debt levels as if they were the same thing.

h/t Brad DeLong