Endgame in Greece


European Union leaders are saying they want the new election in Greece scheduled for June 17th to be a referendum on whether the country will (a) remain part of the euro area, and (b) meet their conditions for EU support in that effort. All concerned will be lucky if the issue has not been resolved before then--by a disorderly Greek exit from the currency system, and what follows. This weekend may be the last chance to intervene to stop that disastrous outcome.

If I were Greek, I would have already turned my euro deposits into notes or deposits abroad. Once EU leaders started talking openly about the case for "amicable divorce"--what astonishing irresponsibility that was--the game was up. An incipient bank run gathered pace this week (more slowly than I would have expected, in fact). If that continues, and the ECB withholds unlimited support from the Greek financial system, the banks have to close and the economy will start to shut down. Without external financing, the government won't be able to pay its workers. Repudiation of debts, chaotic reintroduction of a national currency, and comprehensive economic breakdown will follow--with devastating consequences for Greece and unknowable repercussions for the rest of the euro area.

In a column for Bloomberg earlier this week, I argued that this result, if it comes about, was entirely avoidable and, contrary to a popular line of argument, would serve no larger purpose. After Grexit, things may very well go from bad to worse. The key channel of contagion to the rest of euro area and the world beyond would arise from the question, who's next? Runs on Spanish and other banks are the grave new risk. A scenario in which the wider euro system and even the European Union itself are imperiled is unfolding. And Europe's leaders look on cluelessly.

What's staggering is that we have come to a point where the needless ruin of an EU member is an element of the optimistic case.

Greece's exit from the euro area would demand countervailing assurances that the rot stops there. The crucial innovations that Germany and its allies in austerity have resisted so far -- jointly guaranteed euro bonds, and the European Central Bank as a lender of last resort for distressed sovereign borrowers -- would have to be adopted. The measures that would have stopped things ever getting this bad would finally have to be taken up.

Greece's ruin will have been for nothing, except to serve as an example to others. Likewise the distress in Spain and other peripheral countries. Steps toward full fiscal union will have been taken not because Europe's citizens want them, not as a measured response to the crisis, but far too late, out of desperation after everything else had failed, with a correspondingly increased risk of failure. The EU will have shown that it cracks under pressure, which won't be forgotten. And this is assuming all goes well.

Gaze on your works, Angela Merkel, and despair.

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