Europe’s game of chicken

Europe’s problem is that it has more than one Greece. Greece’s problem is that it is alone.

If it were just a negotiation between Greece and its creditors, the issue would be complex enough, a multi-player game of chicken between Greece, the eurozone governments, the European Central Bank, the IMF and the financial markets. Even so, if that were all, the crisis might well have been resolved by now: debt relief in exchange for structural reform; haircuts, handshakes and Champagne all round.

But all the players in the game know the Greek crisis cannot be looked at in isolation. There are other potential Greeces in the mix, other eurozone countries in the throes of their own debt and economic crisis, if not quite as advanced as that of Greece then easily made so. What happens in Greece will not stay in Greece, but has implications for every other of the simultaneous games of chicken being played in the eurozone.

There is, in fact, a risk of “contagion” in either of the crisis’s probable outcomes. If Greece is granted further debt relief, or rather (since its creditors are not in principle opposed to this) if it is granted relief on too easy terms, the risk is that other debtor countries — Spain, Italy, Portugal, even France — will demand the same. (Those other debtor countries, such as Ireland, that have already made the kinds of painful reforms at which Greece balks would be left to rue their good faith.)

On the other hand, should Greece leave the euro, exposing the previously unbreakable currency union as a mere contingent relationship, it would immediately raise the question of whether other countries might follow the same route, inviting the sort of speculative runs on a country’s debt that can become a self-fulfilling prophecy: as interest rates spike, debt compounds, until Spexit (or Frexit, or…) becomes as inexorable as Grexit. The euro itself could collapse in the chaos that would ensue.

Neither prospect is particularly appetizing, for Europe or for Greece. Greece’s calculation has been that Europe fears the latter scenario more, and thus that, in the end, it must yield. But Europe calculates much the same of Greece: that if forced to choose between accepting the creditors’ terms and leaving the euro, it will surely buckle. Were Greece and the other debtor countries all to threaten to repudiate their debts together, Greece’s calculation might be the right one. But as they will not — for that certainly would mean the end of the euro, which none of them want — Greece’s bargaining position is weak.

It is further weakened by Greek public opinion, in all its internal contradictions. Poll after poll has shown large majorities of Greeks, upward of 70 per cent, prefer to remain within the euro, yet nearly as many — 61 per cent — have just voted No in a referendum that, however confusing the official question, was widely understood to be on whether to accept Europe’s terms for euro membership.

Perhaps the Greeks think they are calling Europe’s bluff: except that, at one and the same time, they are calling their own. The Greeks may have formally voted to reject Europe’s terms, but meanwhile, they are voting with their bank cards on the likelihood of their demands being met. The massive withdrawals of deposits from the Greek banking system is effectively a vote of no confidence in the very negotiating strategy they have just endorsed at the ballot box.

Left to themselves, it is probable that both Greece and its creditors would prefer to stall and fudge for as long as they can, neither con- cluding a deal nor decisively breaking off talks — which is why there will be another stab at negotiations, notwithstanding the creditors’ prereferendum insistence that no such negotiations were possible. But events may well overtake them: even with withdrawals limited to 60 euros a day, the Greek banks are rapidly running out of cash. Indeed, by the time you read this, it may already have happened.

With the Greek government plainly unable to pay its debts, the value of the government bonds the banks can offer as collateral to the ECB, on whose infusions of liquidity they are now utterly dependent, is accordingly reduced. The ECB cannot and will not, as it has made clear, pour money into insolvent banks. If Greece wants a functioning banking system, then, it will have to recapitalize it itself. And since it has no money to do so, it will have to print it. Exit the euro, (re-)enter the drachma.

I suppose there is something heroic about the Greeks, in the phrase of the moment, saying no to austerity. There is also something ridiculous. Austerity is not a choice but a condition. Either you have the funds to pay for things or you don’t. Voting to say you have doesn’t change that, and neither does the vulgar Keynesianism of Greece’s academic enablers. If Greece is broke now, it will be even more broke outside the euro: the printing press can prevent a banking crisis from cratering the economy (by replacing bank-created money with government-created), but it cannot abolish scarcity.

And yet, as painful as leaving the euro would be — the resort to the printing press would sharply devalue the drachma, wiping out much of whatever savings Greeks had left — it may well be Greece’s salvation in the long run. The ability, under the euro umbrella, to borrow at German interest rates tempted Greece to ruin; the inability, at the prevailing (overvalued) euro exchange rate, to earn the foreign currency with which to pay its debts compounded it. Outside the euro, both trends would be reversed.

The outcome al l have feared, then — Grexit — may be the outcome most come to desire. Or at any rate, it is very likely the outcome they must accept.

If Greece is broke now, it will be even more broke outside the euro