Is Greece finished?

In one sense Greece was finished the moment the Great Recession cut its growth rate (in the second quarter of 2009) from among the highest in Europe to almost zero.

Given its high, and increasing, debt-to-GDP ratio, not to mention the preceding run on Dubai’s private-cum-sovereign debt, Greece’s stalled economy precipitated a run on Greek bonds. The writing was on the wall: The huge bailout could only ever delay the inevitable default, especially so in view of the swinging government expenditure cuts that were the condition for the bailout; cuts that have led to a precipitous collapse of demand, a subsequent run on Greek banks (and a flight of deposits to Switzerland and Germany), a wholesale investment strike, and the overarching recession which has already pushed Greek GDP down by 15% since 2008/9. Add to the mix the 21st July 2011 EU Agreement, and in particular the sad reality that that Agreement was not worth the paper it was scribbled on, and what you get is the logical conclusion that Greece is about to default.[1] And since default within a highly financially integrated eurozone is unthinkable, the same train of thought takes its ‘passengers’ straight to the junction where Greece decouples and parts ways with the eurozone.

In another sense however, and even though most of the above analysis is correct, the conclusion reached in the previous paragraph misses the most crucial of points: Greece cannot exit the eurozone without setting in motion a brief sequence of catastrophic moves which will cause Germany to bail itself out of the eurozone before it itself loses its triple-A rating. Why and how is something that I have explained on a previous occasion when Greece’s exit from the eurozone was touted. If I were forced to state my arguments again, I would have struggled to come up with new phrases. So, read that piece again (if you are interested in my explanation that is).

Of course, none of this means that the present path is sustainable. Greece’s debt will be downsized, if not liquidated, one way or another. A hard Greek default can only be prevented by means of steps (like those we advocate in our Modest Proposal) that the current European leadership seems determined to avoid, even if the price of such avoidance is the euro’s collapse. So, the big question is whether the eurozone can survive with a member-state in a state of chronic default. In theory, as in the US, it could be possible to have a member-state of a currency union that cannot meet its obligations to creditors and, thus, remains in some form of receivership until it can climb out of its hole. In practice, however, such a scenario is pure fiction when such a destabilising event occurs within a currency union lacking all institutional mechanisms for recycling surpluses in a manner that might restore stability.

We hear that Mr Schauble is preparing Germany’s banks for the shock of Greek default. Do not believe a word of it. He cannot pull this off and he knows it. At some point he thought that time would allow Germany’s banks to work out ways of insulating themselves from a Hellenic shock. Instead, they seem more vulnerable today than ever. So, what on earth is going on? What is Mr Schauble really doing? What plans is he trying to hatch?

As I have consistently argued, Greece will not be allowed to default before Germany first puts in place a decent plan for splitting Greece’s monetary system from that of the surplus countries. But if I am right that such a plan cannot involve the mere expulsion of Greece from the euro, as it will kick off a chain reaction that will eventually knock France out for a sixer before returning to Frankfurt and Berlin to haunt the ‘planners’, the only logical conclusion that I can come to is that, behind all the talk of a German plan to contain a Greek default or to push Greece out of the euro, lies the groundwork for a pragmatic plan that sees Germany bailing itself out; a plan according to which Germany will round up countries it truly deems worthy of sharing its new currency with (the other three surplus countries of the existing eurozone plus perhaps Poland, the Czech Republic and even Estonia) and exiting in the most orderly manner possible; offering, for example, to the eurozone countries that will be left behind (fretting France in particular) a few gifts (e.g. Germany may choose to foot the bill for existing bailouts), an illusion of unity (e.g. suggesting that the new Germanic currency is also minted and administered by the ECB – which will now be responsible for more than one currency at once), and some vague promises (of possible fusion of these currencies, once the ‘right’ discipline has been knocked into the hearts and minds of the undisciplined).

To sum up, when I hear that Germany is planning for a Greek exit from the eurozone, even for a Greek default, I immediately suspect that Germany is planning a controlled disintegration of the eurozone and, at once, I fear that it will only manage to achieve an uncontrolled disintegration whose end result will be massive recession in the European north and gargantuan stagflation in the European periphery. Or as the bard might have said:

For in that sleep of debt what dreams may come,

When we have shuffled off this Greek coil,

Must give us pause…

[1] The ongoing saga of whether the banks will or will not participate in the by now infamous swap as envisaged by the Agreement is utterly irrelevant. The said swap was but a nice little earner for the banks that, even if it were to go according to plan, would make next to no difference to the Greek debt dynamic.


  • So, what to do now ? Fly for our lives ? Or stay and watch the spectacle of successive collapses ? Or await for the lately announced OEPF* ?

    [* One Employee Per Family]

    • The modern human…run away or stand and gawp…

      How about roll the sleeves up and help rebuild in a better sustainable form?

    • This is what is, quite obviously, needed. But to be able to build things that are not immediately swept away by the Crisis’ tsunami, we need to end the latter. And no amoun t of hard work at the personal level can do this.

  • Brilliant post! You instantly opened my eyes for a new potential way this mess would start unwinding. Coming from Finland, I think we need to stay alone in the next arrangement.

  • Is the European project finished?
    Can Germany still be contained?

    If I understand correctly, the discussion is under the assumption that the underlying problem is purely economic. What if it is also political?

    European union and the euro, just like NATO, was partly meant as a tool of containment of German power.

    Up to now, we got used to viewing Germany as a “leave me alone” country. A pacifist giant with little interest, if any at all, in world power games. Participation in NATO and the European project gave the country acceptance, wealth and leverage. What if the country is changing course to the other side of the pendulum?

    After reunification, Germany has choices France does not have. Balances changed. I am wondering wether what we are witnessing is an effort on the part of this country to liberate itself from the constrains of participation in multilateral organizations and flex its muscles.

    The exposed extreme populism, incompetence and corruption of the Greek political system has given Germany the upper moral standing. But if behind an ideological facade of virtuous policies lies the command “play the game by the rules I set or else…” then what we have is 21st century colonialism. We can never win a game with someone who sets the rules of that game.

    Do we really want to live cap in hand ever after? If not, and if northern countries continue to disregard the interests and concerns of their peers, when time comes to recapitalize Greek banks, it could be a golden opportunity to leave euro.

    • You are presenting excellent arguments of why we would have been better off had we not entered this particular euro-system. Having said that, a Greek exit from the euro, while the euro remains legal tender internationally, will (a) reduce Greek national income by more than 50% in a few days and then (b) bring down the euro itself (with untold consequences for the global economy on whose health the newly impoverished Greece will depend for its next recovery).

    • Thank you for your clear answer.

      Surely, leaving euro will have dire consequences while staying in Greeks and other nations can work for a different euro system.

      But then, what if no proposal like yours gets accepted, and Greece recapitalizes its banks and stays in euro? Is there a Plan B for an exit at a later stage?

      As I understand it, if we do not exit when we hit bottom and our banking system collapses, we never will.

    • This why we are between a rock and a hard place. We cannot recapitalise our banks, unless Europe does it for all eurozone banks – as we suggest via the EFSF. We cannot plan an exit. We cannnot arrest the freefall. All we can do is declare that we shall not go along with the present policies hoping that the powers that be are panicked into saving the euro, themselves and, in the process, giving us a glimmer of hope that we can save ourselves…

    • I am sorry to say but as a german your post just made me laugh, i almost wish you were right 😉

      You massively overestimate german politicians. This is just a ridiculous scenario as german reactions are not the product of a clandestine masterplan to rise from french containment or whatever. In fact the recent statements and actions from Merkel, Rösler, Steinmeier and others just reveal the incompetence of my government. It is chaos, panic and oppotunism, not strategy.

      No one here dreams of overtaking europe as a fourth reich or whatever, people are scared that european institutions and our pathetic politicians manage to destroy everything which was built up over the last 20 years. You have to consider that the german reunification was a really expensive piece of work, german wages did not rise for about 10 or more years, unemployment was high, taxes and social insurance (still are) even higher. Telling the voters we will have to rise taxes and cut spending even more and delay retirement to pay several hundred billions just for greece and more for ireland and portugal is not easy as you may imagine.

    • “European union and the euro, just like NATO, was partly meant as a tool of containment of German power.” Who said that?

  • Looks like a lot of panic here on this board during this beautiful sunny and calm day here in Munich.

  • But wouldn’t the worth of this new Holy Roman Empire’s (Germany + Austria + Netherlands) hard currency instantly go through the roof, thus ending Germany’s export trade surplus in one stroke – something the German job market couldn’t live through? I mean, the German government can’t be blind towards what happened to the Swiss in the last few weeks.

    • Of course it would. And this why Germany has not bailed out yet. But when the freefall gathers pace I very much fear the German elite may find it easier to opt for recession than European consolidation.

    • There is one additional option to keep German trade surplus going plus create manufacturing jobs in other places – so far I’ve only heard about monetarist, mainly Keynesian measures. I believe this step is the key to reducing if not ending European chronic unemployment problem, Or rather it is one of the key measures which are politically unacceptable (oh no! too radical) at this point but would be very effective in stabilizing the world. I quit smoking cold turkey five days ago (and I am unsure I can keep “abstaining” indefinitely, so far I have difficulty concentrating on a sentence) and the addiction I am talking about is far worse than smoking. It is the addiction to Far Eastern imports. Imports from China and Far East in general (Japan, Korea) should be curtailed or stopped entirely by very high tariffs and quotas. Automotive imports stopped 100%. Some countries like Holland would suffer. Among industrial sectors, the Airbus would lose out to Boeing as I am sure states like China will reciprocate. But generally speaking, you would have a massive rise in employment especially in the periphery economies like Greece, Spain and once heavily industrialized states like the Czech Republic which were were devastated by cheap Far Eastern imports. Making anything no longer makes any sense, only speculation does. A toy vehicle would probably cost not 2 euros, but 2.50, so what? This is better than constantly rising taxation to pay for unemployment effectively destroyed through Far Eastern imports. Again this is just one measure but I believe a potent one though fairly radical (not so radical if you think about because Far Eastern markets are pretty much still closed off to the products they are exporting, just ask any Korean who wanted to buy a “foreign” car, what happened next)

  • Hi-

    “Instead, they seem more vulnerable today than ever.”

    I’m wondering how arrive at that conclusion? In my opinion there’s not much exposure left, which, if course, makes a Greek default possible. It appears from the information available through German media, that most of German bank’s exposure has been taken on by the ECB, which, in a way, seems to be a precursor if your ECB-Eurobond version…

  • You know the narrative is suddenly changing when Daily Telegraph’s A. Evans-Pritchard feels empathy for Greece.

    “Instead of recognizing the collective EU failure at every stage of this debacle, the creditor powers are taking out their fury on what is now a victim.”

    Big guys make the narrative. Germany is by far the biggest guy on the block but not the sole big guy. And then there is a much bigger guy next block and he is a debtor.

    If a “massive recession in the European north and gargantuan stagflation in the European periphery” is at stake, repercussions will cross the Atlantic and hit Obama’s second term ambitions. I shall be surprised if America does not step in and use its leverage at some point and changes of tone in media might be the prelude of such a move.

  • Nice piece.

    I suspect the northern European elite is not trying to simply shield itself from the shock of a Greek collapse. What you cannot avoid, you might as well enjoy, and so it looks like they are also preparing the grounds to maximize their benefits in the aftermath of the shock. Just think of all the cheap, expendable labor they could have at their disposal in the midst of an economically and politically crippled European periphery. From that respect, maybe the relation of the USA to Mexico will be a better model than the relation of the federal US government to, e.g., the state of Montana.

    Of course all this could lead to internal recession even in the shielded northern economies. But then, who’s to say that even this will not be one more great opportunity to “fix” some long standing “malaisies” that European states have inherited from the 20th century?

  • Yani:

    It could be a form of the Art of War. Pretending to strike somewhere when your true aim is some place else.

    What is very disturbing for Greek politics is how unaware the average citizens and politicians are.

    It resembles the case of a large forest fire and our preoccupation with a small tree at the edge of the forest whose ability to attract out total attention makes everybody oblivious to the raging fire just a few meters behind it.

  • In America we had this Civil War, which was started for several supremely stupid reasons, but was fought to conclusion over one issue: secession. Lincoln knew that if one state ever left the union, that the union would slowly disintegrate. In a sustained act of mind-boggling courage and vision, he prosecuted the war to the point of reunification at a cost of 650,000 killed in battle, over 5% of population. This doesn’t include the injured and destruction of vast swaths of the country. The devastation was so complete, the South did not recover in any real sense of the word until the 1960’s.
    This is the precedent that haunts EU politicians. If Greece leaves the EMU, the concept of secession for any reason becomes institutionalized. The EMU will crumble over time, and the EU will remain a gutted powerless version of itself, just waiting to evaporate.
    I am not predicting Civil War in Europe, because that is unimaginable. But I am pointing out that the stakes are 100%, and I don’t see a leader of Lincoln’s caliber anywhere in the picture.

    • I found it always mildly amusing how Americans project their simplified and so short history “lessons” as well as the myths about their historic personages like that two bit dictator Lincoln on other nations, situations, eras, economic and political systems and even continents. They do that sort of thing rather frequently.

  • So the fact that Germany is planning a controlled disintegration of the eurozone is something to think about but what about the other big economies of this world. Us from the west or China and the others from the east will do nothing and just follow developments? Or is this something they can benefit from?

  • Excellent analysis, as usual, if only too Euro-centric… In fact, we (Europeans) are not alone, and the stakes are big, bigger than the Euro itself. A collapse of the Euro would bring a chain reaction in the world capital markets, the transmission mechanism being the inter-bank debts…

    See: Desmond Lachman’ s article “The Euro Problems Are America’ s Too” in Wall Street Journal

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