Moral Hazard Taken Too Far

There is an element that links the terrible human tragedy in the Mediterranean and the ongoing Greek crisis.  It is Europe's over-emphasis on moral hazard.  

Moral hazard is the idea that people will act irresponsibly if they do not have to bear the consequences.   No doubt, the concept offers valuable insight, up to a point.  The problem lies with its excessive reliance.

The European Council will hold an extraordinary meeting on Thursday following what appears to be among the most deadly accidents in the Mediterranean.   Illegal human trafficking has risen in recent years as the political instability in Northern Africa and the Middle East has increased.  Unsafe, overcrowded vessels have resulted in thousands of deaths and rising.  An estimated 3500 people died in passage last year though an estimated 219k were successful. 

Due to Italy's proximity and the initial destination of choice, it has taken the lead.  However, its Mare Nostrum program (October 2013) was expensive (estimated cost 9.5 mln euro a month) and was criticized for offering a near taxi service for refugees.  An overcrowded boat, often with no captain, would set sail and then call for help.  Italy's navy would help ensure the safety of the refugees. 

However, many European officials argued that the rescues were encouraging the refugees.  So they replaced Mare Nostrum with Operation Triton.  Minimize rescue efforts in the Mediterranean to discourage such immigration. Estimates suggest Operation Triton costs a third of Mare Nostrum. Don't make it so easy to cross the Mediterranean by making it more dangerous.  Reduce the number of coast guard ships.   That will teach them not to expect European countries to save them from the consequences of their own decisions.  

In contrast, the US has moved in opposite direction.  It is not that the US immigration policy is not without its flaws and challenges.  However, the US has increased its patrol of the US-Mexican borders and has made it much easier for refugees to call for help.  Last year the number of Mexicans dying trying to cross into the US fell to 15-year lows (307 in FY 2014 after  445 in FY2013).  

This week's Mediterranean tragedy that has taken the lives of 700-950 people is spurring European officials to rethink their policy.  Teaching the lessons of moral hazard is recognized as an inadequate response.   Not only will the policy be reformed, but the costs have to be shared.  Italy and Malta and Greece cannot bear the financial burdens alone. 

The time to teach the refugees that the human traffickers are dangerous is not when they are in the middle of the Mediterranean.  The time to teach that playing with matches is dangerous is not while their house is on fire.  

The same general point applies to the official creditors' stance toward Greece.   Greece is guilty purely by being a debtor.  After all, in German and Dutch, the word for guilt and debt is the same (schuld).  If an ounce of forbearance is shown to Greece, it is feared, profligate behavior will be encouraged.   Trying to teach Greece a lesson is taking precedence over facilitating an economic recovery and rehabilitation.  It could wreck the larger monetary union.  

European officials want monetary union to be irreversible.  It took the bloodiest war in American history to resolve once and for all whether that union was reversible.  Understandably, Europe does not want its monetary union to be forged with blood, but it needs to demonstrate its resolve to keep the union together.    A Greek exit, intentional or accidental (whatever that really means) would settle the issue for ever more, with serious financial and political repercussions. Moreover, a Greece outside of EMU and the EU would likely create further challenges for the Europe, including exacerbating its immigration challenge. 

Perhaps the largest deficit in Europe is not about money but in its vision.  It cannot see yet that moral hazard is not the end all and be all.  It cannot be the sole guiding principle without disastrous outcomes.   Greater union is part of the solution to both European migration and Greek challenges.  There is little to be achieved in either case with stressing the moral hazards.  With a 25% contraction in the economy and a three-fold increase in unemployment, the Greek ship is sinking.  Now is not the time to insist on swimming lessons.