I believe that Greece is more likely than not to leave the Euro zone, if not next week, then at some time over the next few weeks or possibly months.
Opinion polls show that the Greek people want to remain within the Euro. It is probably also true that the Greek government desires to remain within the Euro. The other European Union member governments, the European Commission and European Central Banks certainly want Greece to remain within the Euro. In spite of this, the real question is whether a mutually acceptable deal is realistically open to the parties to conclude what has effectively become a renegotiation of the terms of Greece’s membership of the Euro zone. I believe that there is no bridging formula that can be established to the satisfaction of both parties, and Greece will soon find itself with its own sovereign Drachma again.
The Story So Far
Greece is more likely than not to leave the Euro zone.
Greece has fallen far into debt over the past few years and seen a very large contraction in its economy. Unemployment skyrocketed and a regime of fiscal austerity was adopted by Greek governments in return for emergency loans from the International Monetary Fund and the European Central Bank. A new left-wing government was elected some months ago and has taken a more combative stance in representing Greece at ongoing fiscal negotiations with the IMF and the ECB. The Greek government and the Greek electorate firmly believes that the terms and conditions imposed upon Greece are so draconian that the problems of Greek indebtedness and lack of true economic recovery will effectively never be solved. These fairly aggressive negotiations have rumbled on and are currently coming to a head.
Game Theory
There is a well-known proverb that goes something like this: if you owe a bank $10,000 then you have a problem. If you owe a bank $1 billion, then the bank has a problem. This is the heart of the “game theory” that has been playing out in the negotiations. On the one hand you have the older members of the European Union, whom have based their entire post-second world war existence on an ever closer union of the peoples of Europe. The political and business elites are generally committed to this program. They don’t want to ever see any member leave the Euro, let alone the European Union. Furthermore, a “Grexit” (i.e. a Greek exit from the European Union) is widely feared to be liable to create some kind of domino effect that can lead to additional fiscal problems affecting the Euro, the Union as a whole, and in particular the economies of Portugal and Italy.
The Greek government understands this very well, and has believed that ultimately, the European decision makers will be prepared to swallow just about anything – including huge bailouts and emergency write-offs – to keep Greece within the fold.
Greek Miscalculation
…if you owe a bank $10,000 then you have a problem. If you owe a bank $1 billion, then the bank has a problem.
The Greek government has probably miscalculated the willingness of the European side to adapt to Greek demands. After all, if the IMF and ECB egregiously and publicly break all their major fiscal rules – which should prevent them from agreeing to Greek demands – then how will these institutions refuse similar demands from other states in the future? The European project has always suffered from a credibility gap, which may best be summarized by a general feeling that the elites will always break the rules for their own convenience. In the days before the common currency was adopted, this was not such a problem, but once a free floating currency is in play, sticking to rules and maintaining market credibility becomes much more important.
In the end, the European elites will be prepared to make an “example” of Greece, pour encourager les aûtres.
However, the Prime Minister of Greece states that even if Greek voters reject the terms on Sunday, the European Union simply cannot afford to eject Greece from the Euro.
European Miscalculation
A first-time visitor to Greece, freshly arrived from almost any other member state of the European Union, will probably be struck by how different Greek culture is from most of the rest of Europe. Greek society is notably more religious, patriotic, family-oriented and nationalistic compared to countries such as the U.K., Holland, or Germany, for example. Of course, Greece regards itself, and rightly so, as the heart of the European heritage and birthplace of democracy and humanism. However, this is a country which has suffered terribly from long-term foreign domination, aggression and interference, and this factor has made its mark upon Greek culture. Without wanting to sound patronizing, it is a culture where honor and principle are perhaps more strictly adhered to. Others who have bet in the past upon the Greek nation having to bow down and accept the inevitable, have lost that bet. The elites of the European Union seem to have made the same bet.
Where Do We Go From Here?
At the time of writing, it appears that last-ditch negotiations are ongoing, but both sides have very hard public positions. The Greek Foreign Minister Yanis Varoufakis has announced that Greece will not make its next payment to the IMF, which falls due at Midnight tonight. The German Chancellor Angela Merkel has made it clear that if this is the case, the ECB bailout ends at midnight tonight.
However, last-ditch talks are ongoing, with the European Commission offering Greece an allegedly improved offer of a deal.
The Greek banks remain shut with individuals limited to withdrawals of €60 per day. There is a danger that if the ECB bailout is really pulled at midnight tonight that the Greek banks will suffer additional stress tomorrow. Then on Sunday, the Greek people will be voting in a snap referendum regarding whether to accept or reject the deal on offer.
It had seemed clear that a Greek “No” vote would put the parties in a position where it then becomes impossible to avoid a Greek exit from the Euro. However, the German Finance Minister Wolfgang Schaeuble said today that even a Greek “No” vote would not necessary mean the end of the road.
Soon it will be revealed which were bluffs, and which were empty threats.
Sunday’s Greek Referendum
It seems highly likely that the Greek electorate will vote “No” to the terms on Sunday. It can be expected that the “No” vote will be stronger amongst the younger and poorer, while business owners and pensioners are demonstrating a considerable degree of attachment to remaining within the Euro. The Greek Prime Minister’s statement that a “No” vote will not necessitate leaving the Euro may be a sign that he is worried about securing a strong “No” vote.