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No real winners in Greek exit from the euro zone

Grexit is back. We’re three weeks away from the Greek general election, which the left-wing Syriza party, which wants an end to Greece’s punishing austerity regime, seems likely to win. The problem is that the austerity regime is the condition for continued assistance from the euro zone. If Syriza does indeed win and tries to make good on its promises, Greece could be forced to exit the euro.

I have some thoughts about this, which I present in no particular order:

▪ Financial crises take longer than you think. I’ve quoted this before, but Rudiger Dornbusch seems particularly apropos: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought . . . It took forever and then it took a night.”

Reaching an accommodation during the last crisis did not mean that the euro was safe, and even if Greece safely negotiates this round, it doesn’t mean that Greece won’t eventually exit. There is a very serious underlying structural problem in the euro, between rich members who require one sort of monetary policy, and poorer members who would do best with a very different sort of monetary regime. This fissure in the system still hasn’t been resolved.

▪ The deal reached years back is not such a good deal for Greece any more. Back then, leaving made the country unambiguously worse off, because it was running a primary deficit – even if Greece defaulted on all its bonds, it would still be in the red. Which meant that an immediate default would mean even deeper austerity than staying in the euro. Greece is now running a primary surplus(or so they say, anyway). That means default is a more attractive option.

▪ Both sides have a point. The suffering in Greece is deep and real, and the country and the people are much poorer than the foreign creditors they are struggling to pay back. It’s not surprising that Greeks resent this, and want to stop. Just as real, and valid, are German concerns about the moral hazard of letting Greece borrow a bunch of money on what is basically Germany’s credit, and then demand a bailout on easy terms to stay in the euro. Unfortunately, there is no way to reconcile these points of view.

▪ Nationalism remains a real and powerful force. Argentina has repeatedly shot itself in the foot with international bond markets rather than cave into rich, powerful foreigners. There’s a deep human drive to resist RPFs issuing orders, particularly when they are ordering you to embark on an austerity plan at great personal sacrifice. In the next few weeks, a lot of earnest, detailed, and completely correct analyses, chocka-block with facts and figures, will demonstrate beyond a reasonable doubt that Greece would be better off complying with the austerity plan and staying in the euro. These may be very much beside the point.

▪ If it happens, an exit will be a disaster. The mechanics of a Grexit are beyond daunting. The financial system will have to be frozen in order to keep people from immediately withdrawing all their euros and attempting to find them safe harbor abroad. And what do people use for money? In the long run, Greece may be better off, but in the short term, there will be immense suffering. And the contagion may well spread beyond Greece; Ireland seems to have escaped the trap, but Italy, Portugal, and Spain all remain vulnerable.

▪ Exit may become a self-fulfilling prophecy. If people think it will happen, they will rush to withdraw their money from the financial system. The resulting collapse will force Germany to put more money in on easier terms, or Greece to leave the euro. The current market turmoil is not a good sign, though it’s still far from a critical reaction.

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