Too [blank] to fail! The partial solution to the euro crisis

In this article, I reflect on the darkest days of the Eurocrisis. Between 2010 and 2012 one half‐baked policy initiative after another provided no more than a temporary respite. Every action had been some weighted average of the optimal and the agreeable. The consistent crisis‐related irony was that the more Germany complained, the bigger the potential bill got, as capital fled from stricken economies, further fuelling fears of euro exit. The solution was stumbled upon mostly by accident. Eventually it dawned on markets that the exit bill was so big that northern Europe could no longer afford to pull the plug. Once the Greek elections were out of the way in mid‐2012, the Eurocrisis turned into a get rich quick moral hazard festival for asset managers, even as unemployment still soared in Europe. Everything became too something to fail. Spain and Italy were too big to fail; Spanish regions were too politically connected to fail; senior bondholders of distressed European banks were too systemic to fail; Ireland and Portugal were too virtuous to fail. And given the disastrous social consequences that would have been faced by Greece, it was simply too disgraceful for Europe to let Greece fail. In July 2012 Mario Draghi delivered his iconic and extremely helpful “whatever it takes” statement. But to me it was a symptom of the change in tides, rather than being the source of improvement in itself. The problem with moral hazard trades collectively is that they depended upon someone being willing to pick up the bill because it is in the collective interest to do so. In mid‐2012, it appeared like Cyprus was too unfair and geopolitically sensitive to fail (given ties with Russia). And as Greece showed in January 2015, the scope for political brinksmanship and crisis‐resurgence is not necessarily eliminated.