Europe’s end game is just beginning
Talk about the euro zone being ready to let Athens leave is bogus.
CALL it bravado, propaganda or just talk. So far, Europe’s only defence against the very real threat of Greece leaving the continent’s single-currency area seems to be to spread the story that even if that did come to pass, it would not matter that much to the euro zone.
It’s an old chestnut. When it became clear in 2009 that Greece had (again) lied about its budget deficit, several economists sought to dismiss the threat of a contagion by saying Greece is too small a part of the European economy, and hence posed little danger to the edifice.
But the crisis did nonetheless spread to Portugal, Spain and Italy, and it even spooked France. This shows that Greece’s size was irrelevant to the debate. Instead, its real significance lies in what its continued presence in the euro zone says about the durability of the awfully badly designed euro itself.
That brings us to two big questions: Will Athens really walk? And, can the euro survive if it does?
Now that Greece is headed for fresh elections next month, voters will have to do their maths again. If Syriza, the radical left-wing party that finished second in this month’s inconclusive polls, manages to improve its tally, then the Greeks can forget about staying on in the euro zone, which most of them still want.
Syriza leader Alexis Tsipras can unshackle ordinary Greeks from German-imposed austerity. He could even be the one to repudiate most of Greece’s debilitating debt – 160% of one year’s national output. But that will mean Athens must leave the euro, which will make the currency highly vulnerable to a collapse sooner or later.
The intuition behind that is simple. The newly minted Greek currency will likely fall like a stone in the black market, as nobody in possession of euros will want to part with them for a thing of questionable future value.
Whatever confidence is left in savers in Spain or Italy will be shaken. They will wonder if ATMS in their countries, too, will start spewing out pesetas or liras.
Those fears will, in turn, accelerate the flow of bank deposits out of southern Europe and into Germany. After all, Spanish savers won’t mind receiving deutsche marks in exchange for their euros.
The European Central Bank (ECB) will fight this flight of capital by turning the dial of official flows in the opposite direction. But that will require the ECB to scoop money out of the German banking system by writing IOUS to the Bundesbank.
The ECB already owes the German central bank some 644bil (Rm2.56tril). In turn, the central banks of Italy and Spain owe the ECB roughly 275bil (Rm1.09tril) each. These are large amounts and as they increase further, Germany will cry uncle.
In late February, when Bundesbank’s claims on the ECB surpassed 500bil (Rm1.98tril), its president Jens Weidmann wrote a letter to ECB president Mario Draghi, advising him to hold collateral against loans to weaker countries’ national central banks, lest the claims sour.
To see why the euro is a badly designed currency, ask yourself: Would William Dudley, president of the New York Fed, ever dare write to Ben Bernanke, chairman of the US Federal Reserve Board, urging him to ask another regional central bank such as the Richmond Fed or San Francisco Fed to put up collateral against overdrafts?
Paper money cannot survive without trust, and trust is the one commodity that the euro zone doesn’t possess. Certainly not in quantities sufficient enough to make the euro a durable currency.
Another argument you may hear is that Greece gains nothing by leaving the euro zone. It will still need to pay its official creditors – the troika of the European Commission, the European Central Bank and the International Monetary Fund. And repayment would become all the more difficult if Athens had to do it out of tax collected in a devalued currency.
This argument is flawed because Greece will leave the euro zone after defaulting on its debt, not before. The trigger for its departure will most likely be a refusal on the part of Greek authorities to stick to the austerity programme prescribed by the troika.
Once that happens, the bailout package will be scrapped. Greece will run out of cash and go rogue, reneging on all its liabilities – probably only sparing the IMF loans because even with a new currency, the country will need extended financial help, especially to pay the cost of nationalising its banking system.
Since German taxpayers’ cheques will stop coming, Greece will look to China to rescue it via the IMF.
The ECB will be taking a loss on Greek bonds just as Italy and Spain will need fresh ECB funds (through the Bundesbank) to keep their banks afloat. German taxpayers will baulk. “Our future is being compromised,” they will holler.
The talk about the euro zone being ready to let Athens leave is bogus. If he does win a mandate, Tsipras will have much better cards than German Chancellor Angela Merkel who, in her meeting last week with France’s new socialist president Francois Hollande, indicated a willingness to reach out to Greece with new proposals.
The end game is just beginning. — The Straits Times/asia News Network