We could all be losers in this Greek poker game
So now, there can be no question about it. The possibility of “eurozone exit” is real. For years, some of us have been arguing, until we were blue in the face, that the eurozone could break-up. For years the bien pensants have told us we were wrong. Only a fool would say that now. Greek exit could happen. To have worried aloud about the euro unraveling has been to be widely derided. I should know. I wrote my first national newspaper column predicting some nations could end up quitting the eurozone almost fifteen years ago, before monetary union even began.
Those of us who’ve long pointed to the technical incongruity of a single currency area with no common fiscal policy, were shouted down. Concerns about competitive variations, and different countries’ needs for exchange rate adjustment, at different points in time, were waved away, with condescending accusations that the great unwashed didn’t understand Franco-German “political will”.
Even recently, “leading economists” would look at you askance when you were talking about possible eurozone break-up, insisting your views were “mad”. We public non-believers have endured character assassination, whispering campaigns, the whole shebang – I kid you not – as we challenged a system built not on economic logic, but on political hubris and vanity.
Well now, surely, we can all see what was always true. Greece could leave – and that is not only a possible, but an increasingly probable, outcome. And if Greece leaves, and the myth of euro exit-impossibility is fully and demonstrably exposed, other nations could soon follow.
Last week, Greek political parties that few outside the country have ever heard of, ultimately failed to piece together a coalition government, after the inconclusive election on 6th May. The impact of that has been enormous, with global financial markets forced to focus on the prospect of Greek ejection from the single currency. As a result, asset prices dived, with investor sentiment, which has been deteriorating for some time, now very firmly switched from “risk-on” to “risk-off”.
Since the start of May, the FTSE All-World equity index has fallen in all but two trading days, losing almost 10pc of its value. Investors are petrified of a Greek euro exit, not because the country itself is economically important, but because of “contagion” risks.
Greece represents just 2pc of the eurozone’s overall economy. A bath plug, though, accounts for around 2pc of the internal surface area of a bath. If Greece leaves, and the country’s debts are re-denominated in deeply devalued drachma, creditors of all “peripheral” eurozone nations, having been pretty skittish for several years, and more recently becoming frazzled, could end-up enduring a collective nervous break-down. In that event, the single currency would just drain away.
Greek politicians are embroiled in policy dead-lock. Not only has no coalition been formed, but there isn’t even agreement on appointing another technocratic government. The current “caretaker” administration simply won’t be able to implement the measures needed to meet the conditions of the next “bail-out”.
With political tempers rising, and electorates in the wealthier eurozone nations increasingly outraged, the “troika” of European big-wigs now refuses even to visit Athens to review progress on the Greek austerity program until new elections have been held. With earlier bail-out funds in the can, Athens can meet its short-term welfare bills and keep paying its creditors, but only for a few more weeks. So something needs to happen – and fast.
The markets, meanwhile, and the broader public are taking matters into their own hands. The eurozone has been suffering from a gradual bank-run since early 2010, with deposits leaving the fringe countries and heading for stronger members. But this trend has lately accelerated. Some are now not only moving their money, but withdrawing it altogether and hoarding physical euros.
Greek savers pulled €3bn from domestic accounts in the 10 days following the botched election. At the end of March, total deposits were down 17pc year-on-year. Updated figures, if they are ever published, will be much worse. Deposit flight is hardly surprising. A newly re-instated Greek drachma would immediately plunge in value. Investors are also foreseeing the strict capital controls that would come down just before any imposed Greek exit.
A bank run, of course, could rapidly escalate into a bank collapse, and then a sovereign collapse. What would the European Central Bank do? If it stepped-in, other “peripheral” nations, seeing non-conditional bail-outs back on the table, would throw their austerity programs to the wind. Moral hazard, as this column has often said, is not an academic parlour game. And anyway, given that the ECB is bank-rolled by other eurozone countries, another rescue could see governments in Germany and elsewhere finally losing their temper and insisting Greece is chucked-out.
The upcoming Greek election is scheduled for 17th June – so still the best part of a month away. That’s a long time for global markets to fret. The far-left Syriza party, which wants to abandon the latest debt-restructuring deal, is leading in the polls. More mainstream parties, their support fast-falling, are struggling to convey that restructuring matters and that ignoring it would spark a Greek exit.
How could it not? Yes, the Germans, Finns, Dutch and others are spooked by the chaos “Grexit” would cause, which gives Syriza and its like some bargaining power. But refusal to play ball would surely mean the “eurozone solvents” let Greece go. Temporary respite may come if Greece manages to form a government. But this will likely prove short-lived. On-going debt-restructuring will mean more austerity and worsening civil unrest. And even if the ECB goes for further big-time money-printing, that won’t address the underlying imbalances at the heart of the Eurozone.
There is and always was, of course, a fundamental contradiction at the heart of the single currency project. While the ECB controls interest rates and the money supply, each country’s fiscal surplus or deficit is driven by the tax and spending decisions of its own sovereign government.
So it’s simply impossible to enforce collective fiscal discipline in a currency union of individual states, each answerable to its own electorate. The only alternative is to subjugate domestic voters and create a federal government across the eurozone, with a common fiscal policy allowing cross-border transfers. But that’s almost political union, and is now further away than ever.
Right across Europe, much of the public has been deeply suspicious of the euro ever since the idea was conceived. The French only voted “oui” to joining by the narrowest of margins, after their government cobbled together votes from former colonies. The German public, like citizens in so many other member states, was never granted a referendum. Since the single currency’s 1999 launch, in fact, there hasn’t been a single independent opinion poll in Germany in favour of euro membership. No wonder the hard-working German public is seething about the prospect of yet more Greek bail-outs – and who can blame them?
The eurozone’s sovereign debt crisis is casting a long shadow across the entire global economy. Just as the Western world was climbing out of recession, the systemic instability of Europe’s Frankenstein currency union risks sparking another deeply damaging asset-price plunge. This Greek poker game, however it ends, means markets face the danger of some serious volatility. And then, of course, there is Spain …