Eurogroup may figure Grexit doesn’t have to be the end of the Euro

There has been a continual flow of text in the Eurozone crisis based on this idea:  if Greece goes, this is the end of the Euro.  Because of that, the Eurogroup will step back from the brink and make the necessary compromise, provide Syriza with the financing it needs with less or no conditionality, and Grexit will be avoided.  Robert Peston repeats this idea as a near certainty in his blog today on the BBC website.  He had a go repeating it on the Today program, but, mysteriously, the line was cut before he got going.  (Coincidence, or intervention by Schauble?  You decide).

This idea is greatly overplayed.

Greece is a very small country.  It’s too small and different to learn any kind of lessons about how the large, troubled countries would be dealt with.  Those being Spain, Italy, even France.  I’d say that the Germans would not be able or willing to finance any of those countries on their own, or together.  They are too large.  Greece staying or going does not change that calculus, because it doesn’t change the size of that potential bail-out.

What about the smaller countries:  Portugal, Ireland, Cyprus, Belgium…?  Would Eurogroup want to avoid suggesting that there could be exits of those countries?   Yes, but not at any cost:  the moral hazard argument weighs just as heavily.  The choice may between an exit, or [entering Eurogroup minds here] throwing good money after bad, and then exit.

And besides, the other small bail-out countries have been tamed, and the medicine can be argued to be working.  Regardless, with OMTs and QE, there are instruments already in place to fight a test of the exit domino theory.  Greece going would not alter the calculus that the others are too safe or easily protectable, to leave.  There is also, probably, not only an ability to protect those countries, but solidarity too, since they swallowed the pill and did what they were told.

The symbolic damage of Greece exiting is also not as project-destroying as Peston and others make out.  Notice that in the midst of all the chaos the Eurozone admitted a new member, Lithuania.

The calculus that the Euro is an idea – the current set of rules and regulations (discretionarily arrived at since 2010!) – may be as powerful in Eurogroup minds as the statement that it is a particular geographic construct.  If you follow that through, better to let Greece go, leaving the ‘idea’ intact, and maybe one day come back if it chooses.

Pissarides’ Euro apocalypse was different.  He asserted that markets everywhere would run looking for a safe-haven (outside the Euro).  They may.  But he didn’t put any weight on the observation that they haven’t so far run from anywhere except Greek banks.  And there has been  no response but this each time Eurogroup has turned the screw.

My tweets about this generated the response ‘they didn’t run before the Lehman’s run either’.  [eg from Jo Michell at UWE].

That’s a good point.  However, three responses.

First, Lehman’s is fresh in the mind.  That would tell me we would be more likely to experience a pre-Grexit run than otherwise.  [‘I didn’t make it out the door fast enough last time, so this time I’m not going to make that mistake’].

Second, 80% of the exposure to Greek sovereign debt is to other governments.  And there has been lots of time for the private sector to arrange their affairs to cope with the rest.

Third, markets have not been thrown any Bear Sterns-like dummy by Eurogroup to precipitate a repeat of the Lehman’s surprise.  If anything, Eurogroup [is it Eurogroup, or ‘the Eurogroup’?] have erred on the side of tough-talking.  ‘Get out while you can because we are not giving in’.

[HT Robin Wigglesworth for reminding me of the cold war domino analogy.]

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7 Responses to Eurogroup may figure Grexit doesn’t have to be the end of the Euro

  1. Simon Hinrichsen says:

    I think you’re underestimating the empire ambitions of the EU. I think it was Dan Davies who quibbed that ‘if Greece goes, you can’t have Poland’ and I think that’s basically right.

    • Tony Yates says:

      That’s a fair argument.
      But the empire can’t come at any cost.
      And Greece then just falls into a category that other allies reside in, happily.
      And mitigating actions might recover lost grounds, such as recalibrations of the political aspects of the ’empire’ outside the Euro. Eg enhanced military cooperation and integration.
      Neither need it be forever, if one adopts a long term view.

    • mrAnonymous says:

      I think you are underestimating Poland’s fear of Russia.

  2. numawan says:

    In case of Grexit, the danger for the Euro will come from a roaring success for the Greek economy outside the Euro. And in my opinion, everything is in place for such a success. The Greek economy is very much in the same position as the US in 1933.

  3. dan says:

    I don’t really understand any element of your analysis.
    You comment on Germany’s ability to pay, when quite clearly ability is not an issue. Debt levels in Europe are quite manageable. The question is one of choice, particularly when dealing with larger countries. The whole conundrum is how to choose.

    Your analysis on the Lehman parallels also seems entirely misplaced. They didn’t run before Lehman because they didn’t think they’d let Lehman go and they didn’t understand the full implications of letting Lehman go. There is no reason at all to have a high level of confidence that exactly the same thing isn’t happening now. It is entirely possible that people are both betting on the avoidance of grexit, and grexit not being all that bad – how is that helpful in appraising the risk of making the same bet?

  4. Gerexit says:

    You are underestimating the fact that the Euro is also (and probably primarily so) a political project. Forcing a country out goes hand in hand with the ability to convince everybody else that this is entirely its fault and not the result of power politics. This is the game played right now. And while someone may have the ability to steer public opinion against Greece right now, there is no guarantee that the Eurogroup will win this blame-game for ever. Greece could be sacrificed, yes, but such a sacrifice requires that the remaining Eurozone countries will be perfectly aligned and make no policy-mistakes for the years to come. For in the next crisis the ghost of Grexit will hang over their heads… Either France will have to enforce the austerity agenda of DE or DE will have to allow for more flexible monetary policies and substantially smaller surplus. I don’t see anyone willing to do either at this point.

  5. David Blum says:

    These are democracies and they’re not gonna take 50 percent youth unemployment forever. Moreover they’re sacrificing for abad idea.

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