Portuguese journalist Jorge N. Rodrigues noticed a revival in talk about a velvet divorce between Greece and the Eurozone. So, he asked me to comment on two articles in the Financial Times, one by Wolfgang Munchau the other by Hans-Werner Sinn. Here are my responses:
In his Financial Times column Wolfgang Munchau argues that Greece is getting closer to the moment when an exit becomes fiscally feasible as the country is about to achieve a primary surplus. Probably a Grexit will not happen, but its “technical” feasibility may change the debate about Greece and the discussions with the troika in Athens. Antonis Samaras government can use this argument?
Wolfgang’s ‘technical’ point is correct, in that, in theory, the Greek government is now living within its means and only borrows in order to meet its obligations to its creditors. His real point however, if I am allowed to interpret him, is that Greece should now use the ‘technical’ primary surplus position that it has achieved in order to bargain hard and even to default, within the Eurozone, unilaterally – the idea being that it can now shrug its shoulders if Berlin threaten Athens with expulsion from the Eurozone. There are, however, three points to be added here.
First, the primary surplus is tiny and predicated upon the state’s refusal to honour its obligations to its own citizens (e.g. delays in refunding VAT to exporters, non-payment of private firms for goods and services already supplied etc.).
Secondly, An exit from the Eurozone would have devastating effects that the current primary surplus, even if it were real, would not be able to cover for. The exodus of capital would necessitate an effective withdrawal from the EU.
Thirdly, if the Greek government was truly interested in negotiating the very logic of its bailout loans with the troika it should be forging an alliance with the IMF to do so and, regardless of the actual size of the primary surplus, refuse to repay the ECB for the bonds that it foolishly purchased between 2010 and 2011. Alas, the Greek government is not interested in negotiating. It is only interested in being seen to be doing as it is told.
In view of this last point, Wolfgang’s message to the Athens government is: Stop fearing your own shadow and demand a default within the Eurozone. The threat that you will be expelled is empty. An even if you are expelled, things will not be worse than being forced to stay under circumstances that guarantee non-recovery for ages and ages.
Also in the Financial Times, Hans-Werner Sinn, proposes a Eurozone system similar to the old Bretton Woods currency structure under which member countries could exit, “clean” the situation outsider the euro, and an option to re-enter at a later date. An ordelry exit – and he refers to Grexit – should be accompanied by debt haircuts and a conversion into national currencies, a debt redenomination. Do you think this could be an alternative to the two main policies inside the Eurozone political parties, austerity deflation or debt mutualisation
Herr Sinn has been trying his best, for a while now, to convince us that he is innocent of the meaning of a monetary union between surplus and deficit countries. The only explanation I have of his various positions so far, on e.g. the OMT, TARGET2, Greece etc., is that he is keen to see the end of the Eurozone. Take this latest display of innocent commentary: The Eurozone cannot possibly be made to resemble Bretton Woods for a simple reason a child can easily comprehend. Under Bretton Woods, we all had our currencies but were committed to an exchange rate that could only be changed by negotiation (except for a +1% or -1% adjustment). In Euro Land we have a single currency that is not amenable to any differentiation. Period! As for an ‘orderly’ exit, there can be no such thing. One only needs to think a little bit about what that ‘orderly exit’ might entail to realise that it is an impossibility. For the moment it is announced, all hell will break loose. Greek ATMs will run out, immigration officers in airports and ports (not to mention land crossings into Bulgaria and Turkey) will have to search people for cash, the banks will be closed indefinitely, Soon, the ripples of these changes will hit Lisbon, as depositors will queue up to remove their euros from their bank account lest something similar happens there. And so on and so forth. The kindest interpretation I have for Herr Sinn’s articles and speeches is that he has found a clever strategy for pushing for Germany’s return to the DM.
(*) This post was occasioned by two questions posed by Portuguese journalist Jorge N. Rodriguez