Endgame in Greece: The Montenegro Option

Further to my previous post, here's a novel take on Greece's options by Jacob Funk Kirkegaard at the Peterson Institute. He describes two likely scenarios--neither of which, on his view, involve Grexit. Not what you'd call full Grexit, anyway. In the first, Greece comes to its senses, elects a pro-austerity government on June 17th and resumes its efforts at structural reform. The more instability between then and now, Kirkegaard argues, the better the chances for this outcome.

Any acute instability in the Greek economy before the election date resulting from an accelerating bank run will probably strengthen the pro-IMF program parties, because it will demonstrate the potential economic costs of populist policies like Syriza's and thus likely affect the outcome of the election. These circumstances might make it more difficult for Syriza to sustain its electoral success next month.

Many things can go wrong, but I believe that Greece will have a pro-IMF program parliamentary vote after June 17, much as the United States House of Representatives changed its mind in 2008 on the Troubled Asset Relief Program (TARP), which it backed after the financial markets reacted violently to the initial rejection. A victorious functioning pro-IMF program government might very well get minor changes in the IMF program, particularly related to austerity, provided it remains committed to implementing the structural reform components.

Are bank runs that might cause voters to change their mind worth the risk? Unambiguously yes. The euro area cannot negotiate with Greek populists now, lest such talks inspire copy-cat Tsipras's to make demands in Spain, Portugal, or Italy, all of which would stir a backlash in Northern Europe opposing any fiscal transfers to help them with their troubles. Running on irresponsible populist platforms in the euro area must be shown to other countries as dangerous for their economies.

The other possibility, he says, is that the Greeks will do what most people expect and put a populist anti-austerity government in charge. In that case, Greece will end up being ejected from the euro system. However, and here's the novel part, that doesn't mean it will abandon the euro. Greece could be like Montenegro: euro-ized, without being a member of the currency union. Of course, Greeks would like this even less than what they have now. After a month or two of an "extremely unpleasant political experience", the populist government would fall, there'd be yet another election and Greeks would finally choose the lesser evil of austerity. Euros would still be circulating, and as long as Tsipras chooses debt suspension rather than all-out repudiation...

Fences could thus be mended once Greece changes its mind.

Scenario 2 might take longer to play out, perhaps a couple months. But the result would be the same: no Greek exit from the euro. Thus the issue facing Greece is not whether to stay in the euro, but how long to prolong its agony before making the inevitable choice.

So all roads lead to making peace with the IMF and ECB, followed by acquiescence in years of brutal internal devaluation? I doubt it, but we'll see. In any event, we have to get to the first next election before we get to the second next election...