Moral hazard is clue to solving euro crisis

by Hugo Dixon

Reuters
May 20, 2011

Moral hazard is the clue to solving the euro crisis. The idea that entities don’t learn lessons unless they feel pain is valid in the euro zone — but only if the blame is shared properly. The mess isn’t just the responsibility of profligate Greeks, but also of foolish banks and hypocritical Germans and French. Each needs to suffer.

One of the main reasons the region’s financial crisis is so intractable — with endless wrangling over what is the best way forward — is because the different players haven’t fessed up to their own sins. There is therefore a tendency to proclaim their own virtue and pin the blame on others. This makes it hard to come up with a fair settlement.

The main fault line is over whether it is the borrowers (Portugal and Ireland, as well as Greece) who were to blame or the lenders. If, like the German tabloid press, one thinks that it is just the borrowers’ fault, the natural remedy is to crack down on them by imposing stringent austerity programmes in return for bailouts. If one is too lax, they will sin again.

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