Paul
Krugman thinks
that Greece will probably leave the Eurozone. It is generally foolish to
disagree with PK, and what follows is a huge hostage to fortune, but here goes.
It is clear that Greece wants to stay in the Euro. Their people do and so do most
political parties, including Syriza. Their banks are losing money fast, but the
Greek central bank will fill that gap, as long as the ECB allows them to. So a
Greek exit will only occur if the Eurozone in some shape or form decides that
Greece must go. (See John Quiggin here,
for example.) This is the first reason why I think the Euro may survive. If the
Greek people were less committed to the Euro, then in macroeconomic terms the
option of Greece themselves deciding to leave would look quite attractive in
all but the short term, so they might well take that option. (For a different
view, see Jacob Kirkegaard here.)
The
spin being encouraged in Europe at the moment (and I broaden the scope here
deliberately, because it includes
the UK government) is that the next Greek election is in effect a referendum on
Greek membership. The implication, given the previous paragraph, is that if
Greece tries to renegotiate the terms of its existing loans, the Eurozone will
force Greek exit. The key question is
whether this is a credible threat.
The
question is not whether Greece has some moral duty to honour its debts.
Creditors will always use this type of language, because they want as much of
their money back as possible. There will also be plenty of talk of moral
hazard: if Greece is able to renegotiate terms on this occasion etc etc. But
all this is just rhetoric. Greece has already partially defaulted. There seems
to be no obvious moral reason why private creditors should lose some of their
money, but governments who lent to Greece should not, particularly when the
terms of the loans were largely decided by the creditors under duress.
So is
it a credible threat? The main plank of my flimsy optimism about the Euro is that
the decision to abandon Greece is a Eurozone decision, rather than the decision
of sections of German public opinion or particular European officials. The
Eurozone remains a collection of national governments, acting mainly in their
own national interests. Suppose Greece does attempt, after its elections, to
renegotiate its loans. The Troika will have to decide how to respond. Let’s
look at the costs and benefits of this choice.
If it
refuses to move from current agreements, and offers little or nothing in
return, Greece will suspend some or all of its interest payments, and the ECB
would be instructed to withdraw support to the Greek central bank. Crudely, it
will stop giving Greece Euros. The outcome is forced Greek exit, which will almost
surely mean that the Eurozone would lose everything it has lent to the Greek
government, because Greece would default on these loans. So in these very
specific financial terms, rather than restructuring existing loans to try and
get something back, it would lose it all. So far, so bad.
But,
you may think, at least the Eurozone will have drawn a line in the sand, to
discourage other debtor member nations to think along Greek lines. Exactly,
which is why those debtor nations will not want to see Greece exit. If they
have any sense, those governments will know that they too might find themselves
in Greece’s current situation, and so they will not want to be treated in the
same way. What about countries like France and Italy? The election of Hollande
is clearly important in this respect: see Paul Mason here or Linda Barry here for example. In
addition, I think both countries will fear the dangers of the contagion that
Greek exit might bring much more than the benefits of discouraging future renegotiation
of periphery country loans. See R.A. on this here.
We
should also not forget that the IMF is part of the Troika.
The IMF knows that in every case where a borrower nation gets into severe
difficulties, some flexibility has to be shown by creditors. This is usually
difficult in practice because the creditors are many, with each hoping that
someone else will take the hit and lose their money. But not in this case. As
we saw at the recent G8, the pressure on the Eurozone to be accommodating will
be huge.
Now all
this implicitly paints Germany as the odd one out. It is certainly possible, listening to
some sections of German opinion, to believe that Germany will insist on taking
a hard line. I suspect that in reality the German leadership is prepared to
give ground to ensure the survival of the Euro in its present form, although
electoral pressures may get in the way. However Germany is not in charge of the
Eurozone or the ECB. Nor has it any obvious means of coercing the other
Eurozone governments to take a hard line, even if it wanted to.
So the
threat of pushing Greece out of the Eurozone is not credible, if the decision
to do so is made by the Troika, or the Eurozone as a whole. This makes the
important assumption that the ECB will be prepared to continue to provide Euro’s
to Greece. As far as I can see, there is no technical reason why they cannot. (See Marshall Auerback on this.) I
also strongly suspect that the last thing the ECB wants to do is to be seen to
force Greek exit without clear political backing from the Eurozone as a whole.
But the ECB is an independent body without any democratic control and little
transparency, so we cannot be sure what it will do.
To get
a different perspective on the same issue, consider what might happen if the
centre ‘pro-agreement’ parties do much better in the next Greek election than
they did in the past. Problem over? Hardly. It is much more likely that in the
near future the Greek government would still have to ask for the loan terms to
be renegotiated, because its fiscal position has got much worse as a result of
austerity and the crisis. So renegotiation is likely anyway. Are Eurozone
countries really willing to risk so much just to get slightly better terms on restructured
loans?
If this
analysis is right, it raises two questions. First, is it wise for the Eurozone
to make threats which are not credible? Second (and this has some influence on
the first), why does most of the media appear to act as if the threat is
credible? (OK, I’m obviously talking about the media I see, and I’ve no idea
how this is being discussed in Greece.) Is it lack of thought, or just because
the more alarmist you sound the better the copy? I know it is a lost cause, but
the media are an important part of this story. The Eurozone are hoping to influence
public opinion in Greece by making these threats, and if the media called these
threats as bluff, they would be ineffective and would stop being made. So they
are complicit in this game
of chicken. And the problem with games of chicken is that they can go
horribly wrong, as the markets well know. In addition, politicians can get
trapped by their own rhetoric. In which case my analysis above based on
rational self interest may be worth very little at all.
