Recalling my posting a few days ago about moral hazard I espied this glum account of the Eurozone’s woes:

For a long time, they all looked the same. The reckless and the virtuous, the sneaky and the upfront, all the member countries of the euro-area were treated identically, or nearly so, by capital markets. Bond spreads were minimal, as if sharing the same currency had eliminated all the differences between them.

Not any more. Having reached one percentage point in October and two in December, the bond spread between Greece and Germany continues to widen. Ireland is not far behind, and Italy and Portugal are hot on its tail. As for Spain, it has just been downgraded, like Greece.

It is not too difficult to see why Greece is a worrying case. It has built up a very high level of public debt (94% of GDP), a whopping current-account deficit (13% of GDP, three times higher than that of the US) and a rate of inflation regularly higher than its partners’.

A striking opening line to characterise the Eurozone’s members: the reckless and the virtuous, the sneaky and the upfront.

And an elegant summary of the core ‘moral hazard’ point, namely that undue risks can be run by an organisation expecting that if things go wrong it will not have to pay the full cost.

Thus those EU countries which might be described as reckless and/or sneaky have had a marvellous few years since the Euro was created, behaving recklessly and/or sneakily in the breezy confidence that someone else who is virtuous and upfront (ultimately a large northernish EU country, beginning with G and run by disciplined people) will pick up the tab.

But these tabs can get very expensive, even for the G-landers.

So, someone has to step in and stop the rot before things get really out of control. Which in this case looks to mean giving Greece some very sour financial medicine.

But who can do this?

Calling in the IMF would reveal ghastly weaknesses in the whole Euro project.

And calling in eg the Germans to run the show for a while to compel some proper discipline at last might be seen by some people (eg Greeks) as an unacceptable affront to Greek pride and sovereignty.

So, as Jean Pisani-Ferry says in the linked piece above:

… It also shows that building a firewall does not mean that one can do without the fire brigade. But out of a reluctance to centralise and an aversion to mutualise debt, European countries have so far refused this hurdle.

So, the question. What actually is Greece?

A sovereign country whose government and population must take on the chin the full costs of any policy sneaky recklessness which the merciless markets lay at its front door?

 

Or something not that?

 

If the latter, who sorts it all out? And pays the moral hazard bill?

 

As Ayn Rand put it, in arguably the greatest moral-political insight ever written:

 

“We can evade reality, but we cannot evade the consequences of evading reality.”