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When Push Comes to Shove? Exposing the Empty Threat to Kick Greece Out of the Eurozone

A sword of Damocles, we are told, is hanging over Greece.  Even the Greek EU commissioner says that Greeks must accept that their country will be run, nay micromanaged, by a committee of foreign creditors, or else Greece will be kicked out of the eurozone.

This threat is found upon a flagrant lie.  Greece cannot be pushed out of the euro without the euro collapsing in short order.  Let’s see why:

First of all, 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 myriad ways in which power can be exerted upon a weak partner desperate enough to accept any 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, at the same time sweetening the bitter pill with promises of help if it does initiate it.

Secondly, even if the Greek government were thus persuaded to bite the bullet and start the exit process, the result would be a most definite unraveling 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 Prime Minister 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.  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 — NDs being minted as the PM addresses Parliament.

Within minutes of the PM’s declaration, 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.  Then, by the following Wednesday, endless 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 established on basic foods (causing major shortages as wholesalers begin to hoard goods in anticipation of higher prices); all government procurement converted immediately into NDs; capital controls re-established on Greece’s borders; the Schengen Treaty rescinded forthwith (thus re-establishing border controls for travelers to and from the rest of Europe), etc.

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 relative 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 on sovereign bonds and the commencement of negotiations with its creditors, including the IMF.

Let’s say that, in return for the great “favor” Greece has done the rest of the eurozone by falling on its sword, Germany, et al. come to Greece’s side, offering help in salvaging what’s 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 cannot 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) recapitalize 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 of liquidity into Europe’s money markets to steady their nerves.

Let’s suppose that Germany, Holland, Austria, and Finland see the above train of calamities as a nasty but necessary one 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 cross-border capital controls.  For, if such controls are not imposed, the capital flight from these two countries will turn into tsunamis in no time at all: a mere expectation of some that others will correlate the events in Greece with a higher probability of an Irish or Portuguese exit from the euro will suffice as a trigger.  Without capital controls, Ireland’s and Portugal’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 Dublin and Lisbon governments will begin to toy with the idea of a partial default on their crushing sovereign debt.  The resulting rises in CDS spreads will push Spain, Italy, and Belgium off the cliff.  At that point, the EFSF will have to rule itself out of providing a bailout 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 have German bank accounts) 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, there will be endless queues outside the German banks, 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 terrible blow to the German model of growth-through-export-of-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 has no doubt about it.

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 ever choose to chuck Greece out of “their” monetary system, the only sensible way to do it is to opt 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, Mrs. Merkel will have to take the initiative (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 threat, the only 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: the issuing of a fresh gargantuan loan to an insolvent country that neither needs nor wants it.


Yanis Varoufakis is Professor of Economic Theory and Director of the Department of Political Economy in the Faculty of Economic Sciences of the University of Athens.  Varoufakis’ books include: The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy (Zed Books, 2011); (with S. Hargreaves-Heap) Game Theory: A Critical Text (Routledge, 2004); Foundations of Economics: A Beginner’s Companion (Routledge, 1998); and Rational Conflict (Blackwell Publishers, 1991).


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