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A few days ago Mr Philipp Roesler the Economy Minister of Germany and leader of the Free Democratic Party, the junior partner in Chancellor Merkel’s coalition, came up with some tough talk on Greece, by saying that “a Greek exit from the eurozone has lost its horror” and that if Greece cannot deliver on the reforms it signed for, then there should be no further funding. The markets plummeted since if Greece were to be forced out of the eurozone in the next few months, investors would reaffirm their suspicion that the euro zone is not irreversible as many EU Officials often hasten to say in their various pontifications. Inverstors will interpret a Grexit as an indicator that any country –Italy and Spain included– may be forced out of the euro under the pressure of financial stress or internal opposition to reforms and austerity.
Such loose talk fuels uncertainty and given the inadequacy of the euro’s institutional framework to withstand asymmetric shocks, it naturally creates a self-fulfilling prophecy that will eventually tear apart the euro zone, unless there is a radical shift in policy and a thoroughgoing reformation of the institutional order of the single currency; and because a change in policy is not as easy as it sounds, for all kinds of political constraints, a euro breakup will then be more likely. It should be noted though that it is not the costs of the Greek exit that will inflict all that great deal of harm, but the perceived risk investors will see in other euro area member-states.
Grexit and political image
The issue of loose talk and Grexit needs to be addressed from a few vantage points. At first there needs to be a classification between a forced exit and a voluntary one. A forced exit will foster all these negative expectations and risk aversive attitudes outlined above, but a voluntary exit will not necessarily lead to the same chain reaction or at least it will not impart the same information and shape the same image. If the Greek government decides to leave the euro unilaterally it will only confirm what Mr Roesler and the public opinion in Germany, Finland, the Netherlands etc. thinks; namely that the euro is a club of well performing, highly competitive economies, and that Greece not being one of them, was eventually and rightly “relegated” to its national currency.
A voluntary exit would indeed be grist to the mill of hard liners and their sagacious leaders. It would in short create the impression that the major source of the problem -Greece- has at last been addressed. That would obfuscate the fact that most of this existential crisis stems from the flawed architecture of the euro. With such a complacent conclusion there would scarcely be any pressure for much-needed reforms at the European level to arrest the crisis in its totality and to decisively address the confidence crisis that has gripped the euro.
On the other hand a voluntary exit of Greece, would not necessarily trigger a chain reaction. This would depend on how the rest of the euro zone would handle it. If for instance they agreed to take radical steps forward and proved their commitment to the euro with practical measures; then the exit of Greece would be nothing but a manageable shock. The doomsday scenaria that depict Greece as another Lehman Brothers are, in my view, a tissue of fallacies since they ignore the fact that the crisis is a “popcorn effect”, not a “domino” one. The point is that if things are to get worse it will be due to the overall disbelief in the capacity of EU leaders to finally draw a line under the crisis, not because of the losses that will result from a Greek exit.
While technically an exit is always an exit and will require the same set of restrictive and protectionist policies to be pulled through, the broader political context and the way prejudices or popular views will be reaffirmed or falsified, is of paramount importance. A “forced” exit creates a more negative image, which can be very controversial, whereas a voluntary exit is merely the decision of a sovereign state (whether right or wrong is irrelevant) – and politics is all about image and fanfare, either people of the business community like it or not. While I still am of the view that Greece will not leave the euro, for a number of reasons, I believe that if this were to happen it would be branded as a (coercive) “voluntary” act.
Loose talk and deeper problems
Concerning the comments of Mr Roesler, I may note that this is not the first time such palaver has been used by him and others. In fact Greece, an indubitably maladministered country, has been a convenient scapegoat for opportunists and demagogues. But does the fact that some people abuse the situation in Greece, mean that they do not have a right to do so? Of course not. After all they are merely expressing their opinion, no matter how objectionable that may be some citizens or policy-makers. If freedom of speech is to mean anything at all, these people must be allowed to share their views just like everyone else.
Yet this is not the real concern here. The point is that the euro is so fragile that a mere remark can send shockwaves across the financial markets. If a mighty single currency area feels an earthquake each time a populist speaks, then there is something really wrong, decayed and rotten with the euro itself. This is to be attributed to two factors: (1) the inherent instability of the current financial system which is based on frivolous spending, bad regulation, oligopolies and inflation, in large part sponsored by governments and central banks, (2) the inadequacy of the institutional order that underpins the eurozone, which lacks a common treasury, a common government, a unified banking system, mechanisms for collective and efficient action, etc. Given these two major flaws it would be an egregious error to put the brunt of the blame on Mr Roesler or on anyone like him, who expresses after all a very legitimate concern, even if it might be false or objectionable.
What I have always been saying is that the problem is institutional. It is flawed institutions that engender this Hobbesian “war of war against all”, since there are no clear delineations between power, rights, responsibilities, corrective mechanisms, decision-making etc. Instead there is a complex and inefficient political framework, with all sorts of loopholes, that allows much space for arbitrariness and abuses. If we are in search of stability this is what we need to address and reform; and not lose focus by falsely blaming the exacerbation of the crisis on some random comments. What we need is a sense of proportion, before even thinking of ways forward. Loose talk may be a problem, but it is so because of a fragile, ill-designed euro and not the other way round.
Picture credit: Wikipedia