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Can Eurozone Countries Actually Follow Their Own Rules This Time?

Dec 7, 2011
Originally published on December 8, 2011 12:43 pm

When the euro was set up in the late 1990s, the Stability and Growth Pact clearly spelled out the criteria for membership: Countries could not have huge debts, and they needed to keep deficits small. And there was no question — the rules explicitly excluded a little country named Greece.

"If you asked someone in Europe whether Greece would join the eurozone, the answer would have been you are mad, " says Loukas Tsoukalis with the Hellenic Foundation for European and Foreign Policy.

Tsoukalis advised the government on the benefits of euro membership. Because, like most anyone excluded from a club, the Greeks wanted in.

"We have to make an effort to meet the criteria because we absolutely have to be in," Tsoukalis says. "And it worked."

In just a few years, Greece seemed to get its house in order. The country made unbelievable strides in its financial data to meet the criteria. Truly unbelievable. Did anybody believe them?

"No," says Jacob Kirkegaard with the Peterson Institute for International Economics.

But the euro was supposed to be about unity. Countries were saying we are mature, civilized European nations with strong financials. Kirkegaard says no one wanted to stand up and say to Greece — "you are lying." Also, Kirkegaard says there were a lot of comparisons to Sweden popping up in those those meeting rooms — as in, we're all Swedes now.

"When that is the self-identity, all of a sudden standing up to one member of this club that look actually, you're dirty, well they're gonna turn around and say what about yourself?" says Kirkegaard. "You know, who is to say if you can't trust the Greeks can you really trust the Italians?"

Because, really, once you asked that question, the answer was likely to be no.

"Italy also engaged in a number of — let's put it this way — very creative accounting measures to reduce its deficit below the 3 precent limit," says Kirkegaard.

The nations of this new, distinguished group sealed the deal. And they spent the next many years repeating — it sure is a good thing we have these rules.

Meanwhile, Kirkeggard says, pretty much everybody broke the rules, including France and Germany.

This week, in meeting rooms in Paris, Berlin and Brussels, European leaders are sitting down once again and asking that question: How do we enforce the club rules? But this time, they are doing it out loud.

Given that just uttering those words was too scary to even do the first time around, it's not likely to be an easy question to answer

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Transcript

LYNN NEARY, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Lynn Neary.

ROBERT SIEGEL, HOST:

And I'm Robert Siegel. European leaders are trying to find a way to govern the finances of 17 independent nations that all share one currency. France and Germany want to give the EU more power to enforce spending and borrowing rules throughout the Eurozone. Those rules have been in place since the creation of the euro. It's the will to enforce them that's been missing until now.

Chana Joffe-Walt of our Planet Money team has the story.

CHANA JOFFE-WALT, BYLINE: Any club needs rules. It's a matter of self definition, collective, shared identity. And the Europeans knew that. When they set up this shared currency in the late '90s, they wrote a gross instability pact that clearly spelled out the criteria for membership. Countries could not have huge debts, needed to keep deficits small and there was no question, the rules explicitly excluded a little country named Greece. Loukas Tsoukalis is Greek, with the Hellenic Foundation for European and Foreign Policy.

He advised the government on the benefits of euro membership. Because, like most anyone excluded from a club, the Greeks wanted in.

LOUKAS TSOUKALIS: So if you asked somebody in Europe whether Greece would join the eurozone, the answer would have been you are mad, that we have to make an effort to meet the criteria because we absolutely have to be in and it worked.

JOFFE-WALT: Here's what happened. In just a few years, Greece seemed to get its house in order, made unbelievable strides in its financial data to meet the criteria. Truly unbelievable. Did anybody believe them?

JACOB KIRKEGAARD: No.

JOFFE-WALT: That's Jacob Kirkegaard with the Peterson Institute for International Economics. We'll get to him in a second. First, let's just set the scene here. So it's 2001, European leaders gather around tables in Brussels, in Paris and Berlin, rules in hand. And the Greeks were there reporting their data that they had made it. They met the criteria. And typically, here's how this would go. Countries would say we have these rules, every country has to meet the criteria.

Yes, the Greeks would respond, we do. There would be glances around the table. It sure is a good thing we have these rules, someone would say. More glances.

KIRKEGAARD: Nobody wants to be the country to stand up - the leaders of France and Germany and others couldn't really stand up and say, look, our data are superior. You are lying.

JOFFE-WALT: And so no one did. Jacob Kirkegaard says the creation of the euro was all about unity. Countries were saying we are mature, civilized European nations, we have strong financials. He says there were a lot of comparisons to Sweden being thrown around in those meeting rooms, as in, we are all Swedes now. Just bringing up the idea of an independent audit of a member country of this distinguished new club would have been very rude.

KIRKEGAARD: When that is the self-identity, all of a sudden, standing up and saying to one member of this club that, look, actually, you know, you're dirty - well, they're gonna turn around and say, well, what about yourself? You know, who is to say if you can't trust the Greeks, you know, can you really trust Italians?

JOFFE-WALT: Because, really, once you asked that question, the answer was likely to be no.

KIRKEGAARD: Italy also engaged in a number of, let's put it this way, very creative accounting measures to reduce its deficit below the 3 percent limit.

JOFFE-WALT: The nations of this new, distinguished group sealed the deal and spent the next many years repeating, sure is a good thing we have these rules and everyone has to comply with the rules. Meanwhile...

KIRKEGAARD: Compliance was terrible. Not just Greece. I mean, pretty much everybody broke the rules.

JOFFE-WALT: Nearly every country, including France and Germany. This week, in meeting rooms in Paris, Berlin and Brussels, European leaders are sitting down once again and asking that question, out loud this time. How do we police one another? How do we enforce the club rules? Given that just uttering those words was too scary the first time around, it's not likely to be an easy question to answer. Chana Joffe-Walt, NPR News. Transcript provided by NPR, Copyright NPR.