The End of the Beginning

The Greek elections look to me to mark the end of the beginning of the euro crisis. It’s clear that “Greece does what Germany wants” is not consistent with Greece being a democratically governed independent state and German officialdom is reluctant to take the “well you guys went and voted for a bunch of Communists and Nazis so here’s some more free money” viewpoint. Consequently:

But there is also the possibility that the troika will finally refuse to hand over any money whatsoever, something the I.M.F. did a decade ago in Argentina, when Buenos Aires failed to meet its bailout terms. If this happens, many experts say, Europe will be ready.

“Preparations are quietly being made for the contingency if Greece decides that it’s better off with its own currency,” said Heribert Dieter, an expert on international financial markets at the German Institute for International and Security Affairs.

Now what’s interesting here is that the Powers That Be seem to have persuaded themselves that this strategy is consistent with the continued existence of the eurozone. I think it’s not. Once Greece leaves, Spaniards will continue to take advantage of the EU’s lack of capital controls to take their funds out of Spanish banks and place them in Northern European ones. After all, one euro in a German blank is clearly more valuable than one euro in a Spanish bank, but you can trade the latter for the former. That will further increase pressure on the Spanish government to keep spending billions of euros on bank bailouts which is going to force even more stringent fiscal austerity. I don’t know much about Mariano Rajoy so it’s possible that he’s crazy enough to think that a mix of German monetary policy, tax hikes, spending cuts, and bank bailouts even while Spain’s most entrepreneurial citizens decamp for Latin America or Northern Europe is a good idea. But if he does, he’ll soon enough be replaced by someone who knows better. And for Spain, pulling the full Argentina sooner rather than later makes sense because the longer you stay in the more people can expatriate their capital.

And that’ll be the end of that. In the ensuing chaos, the whole thing will break up.

The original German view on the problem was that to save the euro project they had to save Greece. That view was, I think, completely correct and insulating non-Greek banks from the consequences of Greek default doesn’t address the source of that analysis. Once Germany decides it doesn’t want to do what would have to be done to stop one country with an overvalued currency from leaving, the pressure on all the other countries with overvalued currencies to leave will become much more intense.