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Analysis
In the euro area, trust is everything

In the euro area, trust is everything

The danger of pushing Greece to the brink 

by John Nugée

Mon 16 Feb 2015

Economic and monetary union has sometimes been likened to a marriage. If so, it is more a marriage of convenience than a love-match. And in the absence of any greater emotional commitment among the euro members, their relationship is based on contractual trust alone. This makes the interplay between Greece and Germany, at the opposite ends of the debtor-creditor spectrum, all the more sensitive. The outcome (or lack of one) of today’s Eurogroup meeting in Brussels will reflect this delicate reality.

For EMU, breaking the rules is serious and damaging, because trust is more fragile than love. The analogy is between partners in a firm (where dishonesty between partners is unforgivable and quickly leads to breakdown) and partners in a marriage (where the ties are more emotional and so stronger, and can in some cases overcome even quite blatant cheating).

This comparative fragility is important. It means that political and financial leaders in Germany risk overplaying the line that ‘what we are asking Greece to do is for Greece’s own good’. It is not enough for everyone to agree on giving Greece sound advice – the Greeks can still decide not to take it. 

The analogy is the black sheep of a family, say an alcoholic. Everyone in the family (including the person concerned) wants the alcoholic to stop the damaging drinking. Yet the harder the righteous members of the family lecture the black sheep, the greater the risk that they will run off and do something irrational.

Germany is right in calling for deep structural and cultural reform in Greece. The country’s political economy is dysfunctional and corrupt. But if Germany pushes Greece too far, without leeway for resuming growth and lowering unemployment, the Greeks might abandon rationality. They could leave the euro, put up trade barriers, abandon democracy, turn to Russia. None of this would do anyone (not least the Greeks) any good. But desperate people do not always make sound and wise choices.

John Nugée is a director of OMFIF.

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