Greece and Other Troubled States Were Already Being Bailed Out Before the Sovereign Debt Crisis Emerged

Unsatisfied with the course of political events, a group of economists, joined by a former professor of law at the University of Erlangen-Nürnberg, Karl Albrecht Schachtschneider, have questioned the legitimacy of the bailout in front of the German Federal [Constitutional] Court, the Bundesverfassungsgericht. These individuals had already fought and lost one case against the German adoption of the Euro in 1998. This time, however, they insisted on their position that the Greek bailout would turn the ‘European Union into an inflationary union.’ Indeed, financial aid to Greece seems to constitute a breach of European Law. Article 125 of the Treaty on the Functioning of the European Union clearly states that the Union shall not be liable for or assume the commitments of central governments of any member state. Guarantees by the member states for Greek bonds constitute a breach of that rule.

Even ignoring the more explicit bailouts, a tacit bailout was already undertaken in recent years. As Bagus (2010) points out, the ECB has long accepted Greek bonds as collateral for new loans. Since the interest rate at which banks borrow money from the central bank is lower than the interest received from the government bonds, demand for Greek bonds was induced. Had the ECB not accepted Greek bonds as collateral, Greece would have had to pay even higher interest rates than they did. Hence, Greece and other troubled states were already being bailed out by the rest of the Eurozone before the sovereign debt crisis even emerged, as their debt was effectively monetized. In November 2010, every second Euro that the ECB lent to banks went to the ‘financially weak countries.’

—Malte Tobias Kähler, “From German Rules to European Discretion: Policy's Slippery Slope,” in Institutions in Crisis: European Perspectives on the Recession, ed. David Howden (Cheltenham, UK: Edward Elgar Publishing, 2011), 170-171.