It seems unlikely, but Greek Prime Minister Alexis Tsipras and Germany's hard-nosed finance minister Wolfgang Schäuble actually agree on something: Greece’s debt is unsustainable without significant restructuring. Yet German negotiators have argued that European creditors have their hands tied. Existing treaties effectively prevent countries in the eurozone from directly financing other governments, they say.
“Everyone knows that a debt haircut is incompatible with membership in the monetary union,” Schäuble said in a recent interview.
But not everyone is so sure.
"It’s exaggerated," says Pierre-Henri Conac, a professor of finance at the University of Luxembourg. "This has not been really tested before."
Despite Schäuble's protestations, the laws limiting eurozone creditors have ample wiggle room, experts say. Although the European Central Bank is barred from simply giving money to Greece, the law is too vague to rule out other forms of debt relief.
“We are within a gray area," says Vestert Borger, who researches EU law at the Europe Institute of Leiden University in the Netherlands. "It’s very difficult to say what would be acceptable for the courts.”
Skeptics of providing debt relief to Greece say the so-called “no bailout” clause in a key EU treaty prevents a debt haircut, or write-down, since European taxpayers would be effectively paying for it. But Borger says the law is hardly as ironclad as Schäuble suggests.
After all, the measure hasn’t prevented the eurozone from setting up the mechanisms that have provided hundreds of billions of euros in bailout loans to Greece and other countries since 2010.
The establishment of these entities, which provided loans with eurozone capital, spurred various legal challenges from parties wielding the “no bailout” clause and similar treaty language. But in the most crucial cases, courts have upheld the programs, pointing to adjacent clauses in the treaty that allow for crisis-averting measures in “special situations.”
A program called Outright Monetary Transactions, for example, won court approval in June on this reasoning. Set up to buy eurozone bonds during the economic turmoil of 2012, OMT stayed within the bounds of euro policy, the eurozone’s high court ruled, even though it was actively buying up government debt and putting the liability on European taxpayers.
Says Borger, the treaty “seems to offer more room than Schäuble has indicated.”
Giving Money Away?
But hopes for restructuring face numerous complications. Greece’s outstanding debt is held by a wide range of actors, from the International Monetary Fund to individual eurozone governments, each of which has its own policies and limitations.
The most pressing debts are held by the European Central Bank. Debts due in coming weeks and months, like a 3 billion euro payment expected Monday, are government bonds the ECB acquired in 2010 during the first flare-ups of the Greek crisis.
Conac says the ECB is more constrained than other bondholders, such as sovereign states. “If Germany wants to take haircut they can take haircut. The ECB is a different animal.”
EU law forbids the ECB from carrying out “monetary financing.” In essence, the ECB cannot simply print money to fill government shortfalls. Assistance to struggling countries must take the form of debt that is eventually paid back.
Schäuble and others contend that a haircut, which would imply an immediate loss for the central bank, would constitute monetary financing. “You might have a problem with haircuts,” says Conac. “They could say you’re giving money away.”
Schäuble has stated publicly that Greece would be better off outside the eurozone. And only a Greek exit, he says, would enable a haircut.
Analysis Versus Analysis
Despite Schäuble's exclusive focus on haircuts, other options exist. As the IMF has emphasized, Greece might benefit from an extension of loan maturities or a decadeslong grace period during which no payments came due. “Then you’re not giving money away. You’re getting it back eventually,” says Conac.
In any case, the situation will hinge more on politics than obscure EU bylaws.
On Friday, German parliament passed a measure giving a green light to ongoing bailout talks, which are expected to drag on for several weeks. But the vote saw a doubling in the ranks of opposition to German Prime Minister Angela Merkel, who has warned that a Grexit would lead to “predictable chaos.”
With German politicians increasingly wary of further bailouts, eurozone negotiations are likely to remain strained as interpretations of EU monetary law take center stage.
But with such thin legal precedent, says Conac, “It’s just analysis versus analysis.”