Andrew Curry writes: It’s impossible to tell how the stand-off between Syriza, Germany, and the ECB will turn out, and events are shifting daily. But some of the thinking in our Future Perspective on The Future of the Eurozone, published in 2012, helps make sense of the situation. I co-wrote it with the journalist and analyst Matthew Lynn. It’s clear from re-reading our analysis then that Syriza, and Greece, holds more cards than many people think it does.

The Future Perspective observed that financial crises are a routine feature of market economies, and followed familiar patterns. “This time” is never different. A diagram outlined the tensions that framed responses to a debt crisis.

The first observation is that in Greece it has taken quite a long time, and some astonishingly adverse social and economic outcomes, for the political dimension at the bottom of the diagram to push its way to the forefront. This is partly because mainstream parties chose to align themselves with austerity programmes, as they did elsewhere in Europe. Perhaps we should be surprised instead by the speed at which an opposition party from way outside of the mainstream has come to power: historically, such shifts take a generation or more, not a decade. Podemos in Spain, and Sinn Fein in Ireland, could follow.

Partners in growth

The second is that bondholders always want to be repaid in full, but that’s not normally what happens in the wake of a financial crisis. As it happens, almost all of the Greek debt went on repaying risky loans the German banks made to Greece – and now it’s largely held by other European governments. Cleverly, the proposals constructed by Yanis Varoufakis focus on two things: (a) reducing the annual repayments (but not removing them) and (b) linking repayment to growth. As he said on the Today programme before he became Finance Minister, “We want the Germans to be partners in our recovery, not our misery.”

The third is that all financial crises are a systemic problem, not a national problem, and this is no exception. (Michael Pettis has a brilliant long essay about this). As Matthew Klein noted in the Financial Times:

[I]t makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded.

German public opinion seems to think that Greece should pay its debts or leave the Euro, but departure would not be orderly. Departure has short-run costs, but the pain might also be quite short-lived for Greece. Its economy is now growing, from a low base, and it has a budget surplus and a trade surplus. Returning to the drachma could work well, even if Syriza says it won’t take that step. One of our Eurozone scenarios also envisaged countries using the Euro as a trade currency and a local currency (or currencies) to give it a degree of internal flexibility.

Germany should also be concerned about the possibility of Greece leaving the Eurozone. As John Aziz has observed, it does very well out of the Eurozone, both economically and diplomatically. And a Greek recovery outside of the Eurozone would send a strong signal to other economies in Europe. As Matthew Lynn noted in our Future Perspective, once a currency zone starts to unravel, it’s not just the weaker economies that leave.

The image at the top of the post is by Matthias Kabel via Wikipedia, and is used with thanks.

One thought on “Playing poker in the Eurozone [1/2]

  1. Andrew Curry says:

    At The Australian columnist Alan Kohler thinks that Greece should leave the Euro – but the Germans won’t let them. Extract:

    “So, while it’s true that if Greece returned to the drachma it would be excluded from capital markets for a while, it really would only be for a while.

    In the meantime, there would be long queues of tourists at Athens Airport and crowding onto ferries into the Aegean Sea. Tourism would soar, as would its shipping industry, along with the flowering of a thousand export industries.

    If currency manipulation was good enough for China when it came to rebuilding its export industries, why not for Greece?

    Of course, the question is whether Germany would actually let Greece exit the eurozone, and the answer is definitely “Nein!”

    Germany needs Greece (and Italy and Spain) inside the euro to keep the currency down. In a way, the existence of the eurozone is a form of currency manipulation by Germany that’s every bit as direct and effective as China’s peg to the US dollar.”


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