Winners as well as losers if Greece leaves euro
Countdown to state bankruptcy accelerates
by David Marsh
Mon 15 Jun 2015
In the looming debacle over Greece’s membership of economic and monetary union, it will become a commonplace to say that Europe is the loser. There will, however, be victors among the vanquished.
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Last night’s collapse of emergency talks between Greek and creditor representatives in Brussels, and European Commission President Jean-Claude Juncker’s withdrawal from attempts at a negotiated settlement, emphasise how the long-running countdown to official state bankruptcy is accelerating.
In coming days the European Central Bank council could muster the two-thirds majority needed to break off expensive emergency liquidity assistance to Greek banks through the Bank of Greece. If there is a strong risk of default in Athens debt repayments over the next month, not only to the International Monetary Fund but also to the ECB, then the Frankfurt bank can hardly continue to function as the ultimate guarantor of the Greek banking system.
European governments regard the ECB as a still more important creditor than the IMF. As one senior representative puts it: ‘If you default on the ECB, you’re dead.’
The threat of ELA withdrawal forced Ireland in 2010 and Cyprus in 2013 to accept ‘take-it-or-leave-it’ bail-out offers. With Greece, brutal pro-creditor logic could break down or be reversed.
Debtor and creditor positions seem intractable and immutable. Whatever outcome emerges will be dangerous and difficult. But there will be benefits as well as disadvantages from the overdue clarification of Greece’s relationship with the rest of the EU.
Probably, as a first step, we will see currency controls in Greece, similar to those enacted in Cyprus in 2013 but in a much larger economy, as a way of stemming Greek banking outflows. That will lead to two sets of consequences, both positive and negative.
Stopping the deposit haemorrhage would give breathing space to Alexis Tsipras, the Greek prime minister. But it would also lower his manoeuvring room.
Greece has been using outflows of several hundred millions of euros a day (and rising) partly as a means of placing pressure on EMU creditors. Euros that leave Greece have been replaced, through ECB funding mechanisms, by liabilities that, in the case of default, would be levied on European taxpayers. Stopping the outflows would lower the effectiveness of this negotiating tool by limiting the potential losses – although, ominously, it would replace them by others.
Whatever happens, the creditors (led by Germany) will pay.
Tsipras could use the time afforded by capital controls to organise a new political mandate, possibly through a referendum, to determine whether he has sufficient support to carry out more unpopular reforms (such as a curtailment of pension rights) in return for debt relief and more money to allow Greece to stay in the euro.
Some creditors believe that fear among ordinary Greeks that their country is being cut off from the rest of the EU could increase their acceptance for swingeing measures such as pension cuts that the Greeks say are unacceptable yet the Europeans maintain are ineluctable.
Or, more likely, Tsipras could ask the electorate for explicit backing for the ultimate step of withdrawing from the single currency – knowing that the consequences (whatever the more optimistic outcomes advanced by some creditors) could be almost as uncertain for the countries that stay behind as for the one that leaves.
Every step is bound up with consequences, large and small, that spell great risks.
Simply giving Greece extra money, regardless of whether or not it decided reforms, cut spending further and boosted competitiveness, would bring about contagion of a different form to that feared if Greece were to exit the euro.
Countries that have already endured great hardships such as Ireland, Portugal and Spain, as part of necessary suffering to stay in EMU, could be tempted to renege on austerity. German and Dutch voters would be still less keen on the euro if they believed their taxes were featherbedding Greek pensioners benefiting from greater generosity than other parts of Europe. And the ECB would see its disciplinary influence swept away if it carried on propping up Greek banks with additional funding carried out on highly debatable terms.
If Greece did depart from the euro, circumstances in (and around) Greece would be dire for a while. Some people would do better than others. Tsipras and Finance Minister Yannis Varoufakis, more fire-raiser than fire-fighter, would bask in Greece’s traditional role as role as a victim of cruelties and inanities from outside, perhaps even garnering fresh popularity.
Once a new (lower) exchange rate took hold, and after inevitable upset and possible unrest, funds would flow into Greece. Some creditor representatives have spoken in the past about the need for a Carthaginian Peace with Athens, ensuring Greece has a harsh time outside monetary union to and discourage other members from following suit. However, this is unlikely, in view of the widespread concern that a destabilised post-euro Greece would be the epicentre of an ‘arc of crisis’ joining the Ukraine and Balkans with the strife-ridden Mediterranean, Syria and Iraq.
Greece after the euro would probably benefit from substantial aid from the EU, China, Russia and the US. Money would flood in from Greeks who took funds abroad (or never held them there in the first place) seeking their fortunes from deployed confidence and bargain post-devaluation prices.
Personalities such as Jens Weidmann, the German Bundesbank president, who for years have brandished warning signs about the inevitable reckoning from financial profligacy would see their stature reinforced. I suspect that, understandably, we will hear rather a lot from these people in coming weeks.
On the debit side, countries such as Spain, Portugal and Italy that have clung to monetary probity in the face of high unemployment and considerable popular disquiet could see fresh damage to their credibility if one member quits a supposedly irrevocable system. This is the factor that will loom largest if, one way or the other, Greece takes the momentous decision to leave a bloc designed to have no exit.