When push comes to shove? Exposing the incredible threat of Greece’s forced exit from the eurozone
This post appeared on Yanis’ blog today. Republished with the kind permission of the author.
A Damocles’ Sword is, supposedly, hanging over Greece. We are told (even by the Greek EU commissioner) that Greeks must either accept that their country will be run, and micromanaged, by a committee of foreign creditors or else that Greece will be kicked out of the eurozone. This threat is founded upon (to put it not too bluntly) a flagrant lie. Greece cannot be pushed out of the euro without the euro collapsing in short order. Let’s see why:
First, there is no formal mechanism by which any member-state or EU institution can begin a process that leads to Greece’s ejection from the eurozone. Indeed, the eurozone was designed so as to lack such a mechanism for the explicit purpose of impressing its permanence upon the markets.
Of course, there are a myriad ways in which power can be exerted upon a weak partner desperate enough to accept some desperate deal. For instance, powerful EU partners could lean on the Greek government, suggesting that Greece will be taken to the cleaners if it does not itself initiate an exit strategy, sweetening at the same time the bitter pill with promises of help if it does initiate it.
Secondly, even if the Greek government were thus convinced to bite the bullet and start the exit process, the result would be a most definite unravelling of the eurozone. The reasons are evident to anyone prepared to simulate in their mind the train of events that will follow such a decision.
To get out of the euro, the Greek PM would have to convene an extraordinary Parliamentary session on some Friday afternoon during which he will put it to the House that Greece will be withdrawing from the euro by Monday morning. Setting aside the mammoth political and procedural difficulties that this would involve, it is not utterly infeasible that the PM could pull this through. In his speech he would also declare the following Monday and Tuesday to be bank holidays, during which the banks prepare for the switch to the new drachma (say, ND) being minted (as the PM addresses Parliament) in the guts of the Bank of Greece.
Within minutes of the PM’s announcement to Parliament, all ATMs in the land will run dry (as bank customers withdraw all the money they can). For a few days most economic activity will cease and then, on the following Wednesday, huge queues will have formed outside banks to withdraw as many NDs as possible, before the new currency devaluates to the full. Mindful of these developments, the government will have introduced a number of draconian measures: Bank withdrawals severely limited for a minimum six month period, price controls will be established on basic foods (thus causing major shortages as wholesalers will begin to hoard goods in anticipation of higher prices), all government procurement to be converted immediately into NDs, capital controls be re-established on Greece’s borders, Greece to rescind the Shengen Treaty forthwith (thus re-establishing border controls for travellers to and from the rest of Europe) etc.
At the more fundamental level, Greek banks would be made instantly insolvent and would operate only on the basis of liquidity provided by the Bank of Greece. This would trigger an even deeper devaluation of the ND in relation to the euro so that, by the time the banks opened, price inflation would be running riot. Meanwhile, the government would be forced to declare an immediate default regarding sovereign bonds and the commencement of negotiations with its creditors, including the IMF.
Let’s say that, in return for the great ‘favour’ Greece will have done the rest of the eurozone by falling on its sword, Germany et al come to Greece’s side, offering help in salvaging what would be left of the Greek banks and easing significantly the terms of the existing debts to the IMF, the ECB and the rest of the eurozone. Mind you, Germany could not possibly afford to be exceedingly generous with a fallen Greece. For to contain the massive ‘financial event’ that the above train of events would constitute, Germany and the other surplus (or triple-A) countries would have to: (a) Recapitalise the ECB (to the tune of at least €190 billion), (b) bail-out French and German banks exposed not only to Greek sovereign debt but, as importantly, to the debts of the Greek private sector (including the Greek commercial banks), and (c) pump massive (2008-like) levels on liquidity into Europe’s money markets to steady their nerves.
Let’s say that Germany, Holland, Austria and Finland see the above as a nasty yet necessary train of calamities which, at the very least, will rid the eurozone of its most bothersome member. The problem is that the rot cannot, and will not, stop there. Immediately, on the same Friday that the Greek PM makes his fateful announcement, the Irish and Portuguese PMs must make their own, e.g. imposing maximum withdrawals from banks and capital cross-border controls. For if such controls are not imposed, the capital flight from these two countries will turn into tsunamis in no time at all: The expectation that some people will expect others to correlate the events in Greece with an enhanced probability of an Irish or Portuguese exit from the euro will suffice as a trigger. Without capital controls, Portugal’s and Ireland’s banks will come to their knees, their economies’ will be starved of liquidity, the real estate sectors will crash to ever lower levels (as owners sell off with a view to taking their euros out), the money markets will be furiously pushing all periphery paper values through the floor and not even the ECB will be able to save the day.
Once capital controls are put in place in Ireland and Portugal, Spanish bond yield will pass the 7% mark, followed swiftly by a similar effect on Italian and Belgian rates. Having violated the most basic EU rules (regarding the ‘freedom’ of capital to move about), the Lisbon and Dublin governments will begin to toy with the idea of a partial default on their crushing sovereign debt. The resulting rise in spreads and CDSs will push Spain, Italy and Belgium off the cliff. At that point, the EFSF will itself have to rule itself out as a possible bail-out while the German, Finnish, Dutch and Austrian voters demand of their governments to cut the deficit countries off; to bail their own countries out by leaving the euro. Faced with a bill for saving the eurozone that Germany cannot possibly pay for, Mrs Merkel will make her own announcement, on the next Friday afternoon - a week after Mr Papandreou’s dramatic speech in Athens: Germany, Mrs Merkel will pronounce, will be returning to the New Mark on Wednesday morning (precisely a week after the creation of the New Drachma). Unlike the previous weekend, when the Greek ATMs ran dry, Germans (and non-Germans lucky enough to hold a German bank account) will be trying to stuff as many euros into their bank accounts (either at the ATMs or through web-banking) in anticipation of the inevitable appreciation of New Mark. Come Wednesday, the queues outside the German banks will be formed by people desperate to put whatever loose euros they happened to be ‘caught out’ with into their accounts. By the same afternoon, the New Mark will have appreciated by at least 50%, striking a hideous blow to the German model of growth-through-export-surpluses. A new recession will befall the hard-working German manufacturing workers.
Conclusion
The above scenario is as near to a certainty as one can hope for in the topsy-turvy world of our political economy. Europe’s leaders know this, the ECB is painfully aware of it, the IMF have no doubt.
Of course, none of the above prove that Germany and the rest of the surplus countries will not, at some point, decide that they want to cut Greece off; that they are no longer prepared to share the same currency with the likes of Greece et al.
But if they choose to jettison Greece from ‘their’ monetary system, the only sensible way in which to do it is by opting out of the euro themselves. In other words, rather than lean on Mr Papandreou to make his grave announcement to Greek parliamentarians on some bleak Friday afternoon, it is Mrs Merkel who will take the initiate (perhaps in association with like minded governments in Austria, Finland and Holland) and declare Germany’s exit from the euro.
It is in this sense that the threat to expel Greece from the euro is a cheap form of empty blackmail-like threat, the purpose of which is to exact from the Greek polity many pounds of flesh, by which to impress Northern Europe’s despondent electorates that Greece deserves another huge, expensive loan. As is so often the case with naked blackmailing, an incredible threat is pressed into the service of an ill-conceived goal: To the issuing of a fresh gargantuan loan to an insolvent country that neither needs nor wants it.
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