Greece's Uncertain Fate
The question isn't whether Greece will abandon the euro. It's whether Greece will be forced to abandon the euro—and what the fallout would be.
Although much remains uncertain about future developments in Greece and beyond, one thing can be predicted with certainty: no Greek government will voluntarily abandon the euro. The only parties favoring such a move are the (old-style Stalinist) Communist Party of Greece and the neo-Nazi Golden Dawn, neither of which has any chance of being part of a government. It is almost equally certain that no Greek government will take any further steps to implement the austerity measures previously agreed with the “Troika” of the European Central Bank, the European Commission and the International Monetary Fund.
New elections to be held on June 17 are most likely to produce substantial gains for the Coalition of the Radical Left (Syriza) at the expense of both the traditional governing party of the Left, PASOK, and the rejectionists of the Communist Party. Syriza advocates rejection of the current austerity package but is equally opposed to withdrawal from the euro. Given large enough gains, Syriza could potentially put together a government with support, or at least tolerance, from PASOK and the conservative but anti-austerity Independent Greek Party.
But the election outcome may be indecisive, perhaps leading to a government of national unity. Such a government would have little power to do anything decisive one way or the other.
The least likely outcome is a swing back to the traditional parties, with PASOK and its conservative counterpart the New Democracy Party gaining enough seats to form a coalition government. Even such a coalition would be unlikely to have the political will to enforce further austerity measures. On the other hand, it would certainly not abandon the euro.
The Troika’s Options
With these political realities in mind, it becomes apparent that the current obsession—Will Greece leave the euro?—is the wrong question. Outside forces actually matter more: Will the Troika of central bankers and EU bureaucrats force Greece out and, if so, how? Since the answer to the first part of the question is inevitably a matter of conjecture, it’s most useful to consider the question of how an exit from the euro might be forced on an unwilling Greek government.
The first step would undoubtedly be a stop to the payments currently being made to Greece in return for the implementation of the austerity package. But this step, taken in isolation, would not work. The obvious response by Greece, already foreshadowed by Syriza, would be to suspend payment on debts owed to the Troika (and possibly also to the French and German banks in whose interests the Troika has generally acted).
Thanks to the austerity measures introduced already, the Greek government has almost eliminated its primary deficit. That is, its taxation revenue is enough to cover its expenditure requirements, excluding debt service. So, withdrawal of the austerity payments, followed by a default on outstanding debt, would not be sufficient to force the Greek government to abandon the euro.
That leaves one weapon open to the Troika. As Felix Salmon has pointed out, if the ECB were to withdraw its support from Greek banks, they would become insolvent, pushing the economy to the brink of collapse. The Greek government would then have little choice but to print its own currency, presumably drachmas.
Even to suggest this course of action, though, is to see how dangerous it is to all involved. Merely hinting at such an action risks a run on Greek banks, and there is no reason to suppose that the crisis would be limited to Greece. In particular, there would be an immediate risk to Spain, where the banking system is already in trouble.
Pulling the Trigger
The combination of a large-scale default, a banking crisis and an enforced Greek withdrawal from the euro would produce a financial crisis that would make 2008 look like a mere curtain-raiser. That does not, however, mean it will not happen. Thus far, the members of the Troika, and most notably the ECB, have shown a consistent determination to choose the most destructive possible course of action.
In dealing with the current crisis, it’s hard to believe that just a year ago, the ECB was raising interest rates to deal with what it regarded as the urgent threat of inflation—just about the worst action it could possibly take. At the same time as the European economy was sliding into renewed recession, then ECB president Jean-Claude Trichet was boasting of his “impeccable” performance in keeping inflation rates at 2 percent.
Under new president Mario Draghi, the ECB finally reversed course on interest rates and made an attempt to stimulate the euro zone with its long-term refinancing operation. Characteristically, however, the ECB insisted on directing its finance to the banking sector rather than addressing the fundamental problem of government debt. This in turn arises not from profligacy (except in Greece, and only partly even there) but from their own efforts to bail out failed banks. The bank failures were the product of the failed policies of the ECB and, indeed, the failure of the whole project of financial liberalization of which the ECB has been a central part.
Thus far, the Troika has been able to act from a secure institutional basis, able to impose austerity programs and overturn any democratically elected governments that failed to implement them. But a deliberate decision to bring down a national economy would provoke reactions that can only be guessed at. The IMF is used to such reactions, but the European institutions are ultimately the creations of European governments and the people they represent.
The austerity program has failed. European voters have made that clear, and not just in the southern European countries where austerity has bitten hardest. Examples include the defeat of Nicolas Sarkozy in the recent French presidential elections, the rise of the Dutch socialists and the defeat of Angela Merkel’s Christian Democrats in a string of Parliamentary elections.
Can electoral rejection of austerity be converted into serious efforts to force the ECB and the European Commission to change course? The ECB was designed to be independent of all national governments, but the European Commission is an instrument of the European Parliament, which can replace the commissioners at any time. Under ordinary conditions, such a step would be unthinkable. But conditions are not ordinary, and every possibility must now be considered.
Europe being Europe, however, the safest bet is probably some sort of muddled and unsatisfactory compromise. The best such compromise would be one in which the ECB discovers a way around its supposed inability to buy government bonds, while governments agree to shift the focus of austerity measures from the short to the long term—“a marathon, not a sprint,” in the words of UK shadow chancellor of the exchequer Ed Balls.
Greece will bring all these matters to a head. Unless something is resolved by the time Greek voters go to the polls in mid-June, a default and bank crisis, followed by chaotic exit from the euro by several countries at once, could put the problem beyond any hope of salvage.
John Quiggin is a professor of economics at the University of Queensland, Australia and adjunct professor at the University of Maryland, College Park. He is author of Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, 2010).