This article was originally published by the Official Monetary and Financial Institutions Forum (OMFIF) in the The OMFIF Briefing.
In the end, everything ran out: time, money, patience, luck, generosity – and the Greek finance minister. Yanis Varoufakis’ early departure from the week’s fourth Eurogroup meeting, hotfooting it back to the Athens cauldron, gave the other Europeans the cue to say that Greece had unilaterally broken off negotiations and was ejecting itself beyond the European Central Bank’s emergency lending assistance. Recriminations all round.
The invective has been stronger than usual. It’s rare to have both sides accusing each other of ‘blackmail’. But, after all, this is a close-knit though unhappy family. They owe each other hundreds of billions of euros. It confirms a recurring pattern with currency upsets. Whether with Britain leaving the gold standard in 1931, the Americans abandoning Bretton Woods in 1971, the French quitting the European ‘snake’ in 1974 and 1976, or the UK tumbling out of the exchange rate mechanism in 1992, the people to blame are always the same: foreigners.
It’s not too late to return to the negotiating table. Angela Merkel, François Hollande and Christine Lagarde, three people with much to lose from the debacle, may weaken their respective negotiating positions, and make the Greek government look statesmanlike, by holding out blandishments ahead of Sunday’s referendum. No doubt substantial debt relief – promised to the Greeks more than two years ago – will find itself back in the bargaining. But that is unlikely to lead to any great clarification.
The Greeks will be voting in a hastily called plebiscite of dubious validity on a question to which no one knows the answer and which may anyway (since the creditors have withdrawn their offer) be irrelevant. One person who comes out of this relatively unscathed is David Cameron, the British prime minister, who has been journeying around Europe with serious intent, good-humoured mien, and an intelligent procedure on how to rectify Britain’s relationship with the rest of Europe.
The Greek vote, and the high emotions surrounding it, highlight an issue that has dogged the euro since it started: whether monetary union without political union is either sustainable or democratic. Many people, from British leaders who chose to stay out, to German leaders who had no choice but to go ahead on an unsolid basis, stated that political and monetary union had to go together.
Even though the ECB has been trying to stay above politics, a clear part of its strategy in freezing ELA for Greek banks is to show Greece’s citizens the dire consequences of Athens’ obduracy – and persuade them to stay in the euro, even with further suffering.
Whatever happens, there will be contagion, as much political as economic, with other euro countries. If the creditors make concessions and the Greeks vote to stay in, other debtors will want similar treatment. If the creditors remain tough (which I suspect they will) and the Greeks leave – whether they do well or badly (and my belief is that they would end up doing rather well, after an initial period of pain) – then this will set a pattern for others.
On an occasion six years ago, at a semi-official Anglo-German meeting with financial and business figures in London, I asked a senior German banker how he would react if Greece ever voiced the wish to leave the euro. This was an open question and answer session, during a brief period of pre-Greek complacency, in front of about 50 people. ‘I would act like Clint Eastwood,’ my banker friend said. ‘I would say, “Go ahead, make my day.”’
There was never much bonding between Greece and the Germans. The difference now is that Greece’s political and economic weakness (and that of the states around it) gives it incongruous strength and leverage. And that’s why Chancellor Merkel, gritting her teeth, will in the next few days be looking for ways, against all the odds, of keeping Greece in this disconsolate family club.
