Greek plan B would have been self-fulfilling and sabotaged plan A.

Some are debating why Syriza appeared to have no plan B when it became clear that their strategy of trying to gain significantly easier terms for a new bailout was going to fail.  Paul Krugman puts it down to incompetenceAristos Doxiadis argues instead that having a plan B would have turned the Greek electorate against Syriza, since they were determined to stay within the Euro;  and that the act of spelling the plan B out would have revealed how bad it was, causing them to back down.

I think there was another reason.  Setting in motion operational plans for creating its own currency would have made that plan B self-fulfilling, by accelerating the bank jog into a full-scale bank run, as people feared their deposits being re-denominated into a new currency they rightly presume would be less valuable.

Such plans require contracts with large-scale printing firms;  they require brainstorming, drafting, agreement, sequencing.   A process that would need to involve at least dozens of senior officials across government, the central bank and the banks themselves.  Careful thinking has to go into which button to press when.  Much legislation would have to be drafted and passed.  Action plans would need to involve the police and armed forces, and someone who owns a lot of trucks.

It would be impossible to carry out these tasks in secret without leaks in any government.  And certainly in trauma-torn Syriza.  [Witness the pulling-his-hair-out cry for help document written by central bank governor Kournaras a few weeks ago].  Leaks would sew panic and chaos, and probably jeopardise negotiations over the terms of plan A, the  bailout.  [‘Why should we fund them if they are about to cut and run?’]

The lack of a ready to go plan B is therefore not an accident.  Look around the other countries in the Euro, and my guess would be that there is also no ready to go plan B.  Because having one would undermine the degree to which being in the Euro constitutes an act of hand-tying;  and therefore erode one of the key supposed benefits of being a member.

A Plan B that was already worked out and ready to execute at speed would be like a marriage in which both parties have their kitchen walls adorned with post-its for divorce-lawyers and ready to go applications for internet dating websites.

 

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6 Responses to Greek plan B would have been self-fulfilling and sabotaged plan A.

    • Tony Yates says:

      I saw this on twitter. In theory, you have to make your outside option as good as you can. But in this case I don’t think you can with Grexit, for the reasons explained.

  1. Luis Enrique says:

    ah I have just seen you tweeted it!

  2. BRaven says:

    Was the Varoufakis plan to nationalize the Bank of Greece and issue their own euros not a plan B? EZ response would surely have been to declare greek euros a new currency, leaving the blame with the EZ.

  3. nanikore says:

    This is one of your better posts. I have found a lot of the posturing from economists towards the Greek situation (using ISLM or New-Keynesian gadgets as a basis of analysis and saying their problems would be simply solved with devaluation without really understanding or wanting to understand Greece and its economy) incredibly arrogant.

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