Wall Street Journal
June 10, 2011
Wolfgang Schäuble has been an avowed advocate of Europe's single currency throughout his career. The German finance minister also admits he always saw monetary union as a precursor to political union. That makes his insistence on a restructuring of Greek government debt even harder to fathom. His proposal to extend maturities by seven years threatens to blow the euro apart.
Mr. Schäuble's frustration is understandable. "The single currency wasn't supposed to be a system of redistribution," he said recently. In fact, monetary union was supposed to encourage profligate members to live within their means and strengthen their competitiveness. In other words, member states were supposed to become more like Germany.
That some failed isn't solely due to reckless governments and irrational investors. Markets respond to incentives: The decision to make euro-zone government bonds zero-weighted for bank capital purposes encouraged investors to drive down borrowing costs across the euro zone. Moral hazard was embedded from the start.
Mr. Schäuble says the only way to restore discipline is to force bondholders to share the burden. But there is a major inconsistency in his position: Under the European Stability Mechanism, due to take effect in 2013, he says private-sector involvement will be needed when debt is deemed unsustainable. Yet the European authorities and IMF have said Greece's debt burden is sustainable if it sticks to its program. So Mr. Schäuble is proposing to turn private-sector involvement from a last resort to a first.
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