Greek Theater and Europe’s Future
Why politicians welcome the Grexit debate – and why it will do little to solve Europe’s woes.
- It is quite attractive for Eurozone politicians to play with the idea of a Grexit.
- Exiting the euro is a very painful exercise for anyone who tries to go that route.
- The real problems of Europe are threefold – the lack of competitiveness, structural rigidities and over-indebtedness.
- Even six years after the onset of the financial and Eurozone crisis, a true recovery is not in sight.
No wonder politicians in Berlin and Brussels are not too inclined to give in to being blackmailed by Alexis Tsipras and a potential next Greek government led by him. And with good reason.
These political leaders point to the fact that a “Grexit” would no longer affect financial stability or the existence of the Eurozone overall. This is due to the fact that most of Greece’s debt today is held by governments and the ECB.
It is, in fact, quite attractive for Eurozone politicians to play with the idea of a Grexit. If things were to turn in that direction, the resulting chaos in Greece – including bank runs, capital controls and an even deeper slump of the economy – could serve as a powerful example for other countries toying with similar ideas for opting out.
A strong message to Europe
The political message sent out across Europe would be stark: Pursue the same policy options – and risk the same devastating exit experience. Exiting the euro is a very painful exercise for anyone who tries to go that route.
Interestingly, on the opposite end of the political spectrum, there is similar excitement about a potential Grexit. The turbulences that would follow – if and when Syriza indeed overplays its hand — would suit the needs of those who like to see more intervention by the ECB, notably via quantitative easing.
A Eurozone without Greece, while more aligned on the economic strategy of austerity, would be commensurately more challenged by financial markets. It would undoubtedly need the strong support of its central bank – this time not only with words, but also with action.
Herein lies the real danger of the upcoming Greek theater. The example would be used to deter the publics of other countries from pursuing a similar inclination to opt for an end of the euro experiment.
Over the short and medium term, this might well work. But a look at the fundamentals of the Eurozone is sobering. Even six years after the onset of the financial and Eurozone crisis, a true recovery is not in sight.
Most countries remain in recession – some in outright depression – with record high levels of unemployment. Encouraging signs like the slight improvement of employment in Spain remain singular incidents.
Worse, public and private debt levels continue to grow faster than the economy. In all countries, debt levels are significantly higher than in 2007. In contrast to the United States, Europe has not even started to deleverage.
This is largely a function of smarter bankruptcy laws in the United States, where an unsustainable debt burden can be readily written off by the institution holding that debt.
The lack of growth makes it even harder to stabilize the debt burden, let alone to reduce debt levels.
Perverse as it may sound, the Greek theater may pave the way for a continuation of the current failed policy of fighting a crisis that was caused by too much and too cheap money with even more and even cheaper money.
The ECB, caught in the middle as a central bank often is, can only buy time for the politicians to deal with the fundamental challenges of the Eurozone. What has to happen is a Eurozone-wide debt restructuring – mind you, not only for Greece!
Unfortunately, politicians make no use of the time bought by the ECB. Since Mario Draghi’s famous promise to do “whatever it takes,” politicians have outsourced crisis management to the central bank.
To be sure, the current low interest rates represent a nice source of profit for speculators (who bought the bonds previously at low prices and can now sell them to the ECB), but they are no remedy for the real economy.
The real problems of Europe are threefold – the lack of competitiveness, structural rigidities and over-indebtedness. For all of the ECB’s actions, these deeply rooted problems are not solved, but grow bigger every day.
Unless things change dramatically, Europe, almost all of it, is on the inside track not to become like Greece, but like Italy: immobile, uncompetitive and effectively bankrupt.