When push comes to shove? Exposing the incredible threat of Greece’s forced exit from the eurozone

A Damocles’ Sword is, supposedly, hanging over Greece. We are told (even by the Greek EU commissioner) that Greeks must either accept that their country will be run, and micromanaged, by a committee of foreign creditors or else that Greece will be kicked out of the eurozone. This threat is founded upon (to put it not too bluntly) a flagrant lie. Greece cannot be pushed out of the euro without the euro collapsing in short order. Let’s see why:

First, there is no formal mechanism by which any member-state or EU institution can begin a process that leads to Greece’s ejection from the eurozone. Indeed, the eurozone was designed so as to lack such a mechanism for the explicit purpose of impressing its permanence upon the markets.

Of course, there are a myriad ways in which power can be exerted upon a weak partner desperate enough to accept some desperate deal. For instance, powerful EU partners could lean on the Greek government, suggesting that Greece will be taken to the cleaners if it does not itself initiate an exit strategy, sweetening at the same time the bitter pill with promises of help if it does initiate it.

Secondly, even if the Greek government were thus convinced to bite the bullet and start the exit process, the result would be a most definite unravelling of the eurozone. The reasons are evident to anyone prepared to simulate in their mind the train of events that will follow such a decision.

To get out of the euro, the Greek PM would have to convene an extraordinary Parliamentary session on some Friday afternoon during which he will put it to the House that Greece will be withdrawing from the euro by Monday morning. Setting aside the mammoth political and procedural difficulties that this would involve, it is not utterly infeasible that the PM could pull this through. In his speech he would also declare the following Monday and Tuesday to be bank holidays, during which the banks prepare for the switch to the  new drachma (say, ND) being minted (as the PM addresses Parliament) in the guts of the Bank of Greece.

Within minutes of the PM’s announcement to Parliament, all ATMs in the land will run dry (as bank customers withdraw all the money they can). For a few days most economic activity will cease and then, on the following Wednesday, huge queues will have formed outside banks to withdraw as many NDs as possible, before the new currency devaluates to the full. Mindful of these developments, the government will have introduced a number of draconian measures: Bank withdrawals severely limited for a minimum six month period, price controls will be established on basic foods (thus causing major shortages as wholesalers will begin to hoard goods in anticipation of higher prices), all government procurement to be  converted immediately into NDs, capital controls be re-established on Greece’s borders, Greece to rescind the Shengen Treaty forthwith (thus re-establishing border controls for travellers to and from the rest of Europe) etc.

At the more fundamental level, Greek banks would be made instantly insolvent and would operate only on the basis of liquidity provided by the Bank of Greece. This would trigger an even deeper devaluation of the ND in relation to the euro so that, by the time the banks opened, price inflation would be running riot. Meanwhile, the government would be forced to declare an immediate default regarding sovereign bonds and the commencement of negotiations with its creditors, including the IMF.

Let’s say that, in return for the great ‘favour’ Greece will have done the rest of the eurozone by falling on its sword, Germany et al come to Greece’s side, offering help in salvaging what would be left of the Greek banks and easing significantly  the terms of the existing debts to the IMF, the ECB and the rest of the eurozone. Mind you, Germany could not possibly afford to be exceedingly generous with a fallen Greece. For to contain the massive ‘financial event’ that the above train of events would constitute, Germany and the other surplus (or triple-A) countries would have to: (a) Recapitalise the ECB (to the tune of at least €190 billion), (b) bail-out French and German banks exposed not only to Greek sovereign debt but, as importantly, to the debts of the Greek private sector (including the Greek commercial banks), and (c) pump massive (2008-like) levels on liquidity into Europe’s money markets to steady their nerves.

Let’s say that  Germany, Holland, Austria and Finland see the above as a nasty yet necessary train of calamities which, at the very least, will rid the eurozone of its most bothersome member. The problem is that the rot cannot, and will not, stop there. Immediately, on the same Friday that the Greek PM makes his fateful announcement, the Irish and Portuguese PMs must make their own, e.g. imposing maximum withdrawals from banks and capital cross-border controls. For if such controls are not imposed, the capital flight from these two countries will turn into tsunamis in no time at all: The expectation that some  people will expect others to correlate the events in Greece with an enhanced probability of an Irish or Portuguese exit from the euro will suffice as a trigger. Without capital controls, Portugal’s and Ireland’s banks will come to their knees, their economies’ will be starved of liquidity, the real estate sectors will crash to ever lower levels (as owners sell off with a view to taking their euros out), the money markets will be furiously pushing all periphery paper values through the floor and not even the ECB will be able to save the day.

Once capital controls are put in place in Ireland and Portugal, Spanish bond yield will pass the 7% mark, followed swiftly by a similar effect on Italian and Belgian rates. Having violated the most basic EU rules (regarding the ‘freedom’ of capital to move about), the Lisbon and Dublin governments will begin to toy with the idea of a partial default on their crushing sovereign debt.  The resulting rise in spreads and CDSs will push Spain, Italy and Belgium off the cliff. At that point, the EFSF will itself have to rule itself out as a possible bail-out while the German, Finnish, Dutch and Austrian voters demand of their governments to cut the deficit countries off; to bail their own countries out by leaving the euro. Faced with a bill for saving the eurozone that Germany cannot possibly pay for, Mrs Merkel will make her own announcement, on the next Friday afternoon – a week after Mr Papandreou’s dramatic speech in Athens: Germany, Mrs Merkel will pronounce, will be returning to the New Mark on Wednesday morning (precisely a week after the creation of the New Drachma). Unlike the previous weekend, when the Greek ATMs ran dry, Germans (and non-Germans lucky enough to hold a German bank account) will be trying to stuff as many euros into their bank accounts (either at the ATMs or through web-banking) in anticipation of the inevitable appreciation of New Mark. Come Wednesday, the queues  outside the German banks will be formed by people  desperate to put whatever loose euros they happened to be ‘caught out’ with into their accounts. By the same afternoon, the New Mark will have appreciated by at least 50%, striking a hideous blow to the German model of growth-through-export-surpluses. A new recession will befall the hard-working German manufacturing workers.


The above scenario is as near to a certainty as one can hope for in the  topsy-turvy world of our political economy. Europe’s leaders know this, the ECB is painfully aware  of it, the IMF have no doubt.

Of course, none of the above prove that Germany and the rest of the surplus countries will not, at some point, decide that they want to cut Greece off; that they are no longer prepared to share the same currency with the likes of Greece et al.

But if they choose to jettison Greece from ‘their’ monetary system, the only sensible way in which to do it is by opting out of the euro themselves. In other words, rather than lean on Mr Papandreou to make his grave announcement to Greek parliamentarians on some bleak Friday afternoon, it is Mrs Merkel who will take the initiate (perhaps in association with like minded governments in Austria, Finland and Holland) and declare Germany’s exit from the euro.

It is in this sense that the threat to expel Greece from the euro is a cheap form of empty blackmail-like threat, the purpose of which is to exact from the Greek polity many pounds of flesh, by which to impress Northern Europe’s despondent electorates that Greece deserves another huge, expensive loan. As is so often the case with naked blackmailing, an incredible threat is pressed into the service of an ill-conceived goal: To the issuing of a fresh gargantuan loan to an insolvent country that neither needs nor wants it. 

38 thoughts on “When push comes to shove? Exposing the incredible threat of Greece’s forced exit from the eurozone

  1. Pingback: What Happens if the Euro were divided in Two?

  2. Dear Professor Varoufakis,

    Congratulations for your recent appearances in the media
    where you gave good answers to the “self-confident-all-knowing” reporters.
    I am an old greek Pappous with many grandchildren and
    worry about their future.
    Looking back in my life I can now simplify some so-called complicated things.
    Please consider my following comments/questions and give me an answer,
    if you have time.

    1. A Greek businessman from Egypt who graduated in Economics
    from a US University once told me a wise quotation:
    “Economics is common sense, made difficult”.
    Many “Golden Greeks” could not write their name, not even in Greek.
    All they had was common sense and hard work.
    In the last 30 years Greece has been governed by ex-Professors of Economics
    and other wise guys. The current debt is the result of their accumulated performance!
    Congratulations to them!
    My first question is then:
    Q1. Why did they allow this debt to build up to such a level?
    Did they not see the annual OECD Tables about Greece?

    2. Is knowledge in Economics sufficient for a good government?
    The end result, achieved in any job, may be approximated by the product:

    Result = (Knowledge of the job) * (Honesty, Love, Compassion etc)

    To maximise the result, ideally you want to maximise both terms.
    The second term can have negative values, ie Dishonesty, Hate etc.
    A mediocre economist with Honesty and Love will create some positive result.
    A dishonest politician with a great “scientific” knowledge,
    will use his knowledge to “scientifically” deceive the people.
    Such a bad PM will make the people believe that they can buy shares
    at the top of the bubble. (Does this remind you of anything?)
    Q2. How do you propose to safeguard the maximization of the above
    equation in the government?

    3. IMF says this is a crisis not for 1-2 years but for a generation.
    With my old-day simplifications, I could not agree more.
    The average wage for Greece is about 12000 USD
    and the Chinese (and by coincidence also the Global) average is
    around 5000 USD!
    Q3. Don’t you think that the trend (like in communicating vessels)
    will be for Greece to (slowly) come to the Chinese/Global average level?

    4. Following the above experience, it now seems that
    what we need is more than a Ph.D.in Economics.
    My thick Economics textbook by R.G.Lipsey & P.O.Steiner says
    “Economics is not Ethics”. However the bitter truth is that
    we need Economists with honesty, love, compassion. Yes compassion.
    The famous God-fearing King and Prophet David
    (whose name is now borrowed by millions of men)
    and whose Psalms are read by Christians and Jews, has said:
    “Put not your trust in princes, in the sons of men, in whom there is no help”.
    Q4. Why did you put a question mark (?) between the words compassionate and God, above?

  3. I see an almost consensus on total failure of Eurozone after reading all comments.Is this a reality?Sure there are big flaws in the framework in the Eurozone not considering the need for a united fiscal control and joint funds for a solidarity development among countries with different Industrial capacity ,competetivenes and
    structure.Cultural differences ,languages etc add further
    need for taking a gentle stance and being humild in judging ,blaming sort of game everyone dwells in.Respect of EU leaders sincere efforts to find resolve to Greece situation.I trust leaders will not let the Euro fail for a number of good reasons both economic and political.In the actual Global Economy that so far only bring layoffs and debts for western countries must find the NEW NORMAL meaning Europe together have to fight against US, CHINA,etc .Even in China cheap labor will not last forever.UNITED EUROPE is part of the GLOBAL Economy.
    No living Top politician in Europe easily abandon SHIP.
    Now it´s time for creative thinking at vital institutions like ECB.Surely they are aware of all aspects and consequences of taking steps in line with the MODEST PROPOSAL and most probably this will unfold behind the scenes buying time for a political acceptance to further strengthen the European continent in the GLOBAL SCENE.The Chinese are allready in favour of extending reserve currency status outside USD.Everybody seems to have forgot that the US economy is in a huge debt unseen since WW2.Admit that Mrs Merkel is an old FOX taking on spot decision of German Atomic power exit in 10y!!!.Germans are leading in Solar technology etc it all make sense.With north africa situation resolved the DESERTEC project that will provide Solar Energy to Europe realised in same timespan.
    Faith in human resolve!

    • >>>to fight against US, CHINA
      This needs a competitive environment. The EU is not a competitive environmwnt anymore. It does not pay to be frugal and it does not pay to be economically successful. It is a transfer union.

      Transfer unions do not allocate capital where the most value is created per Dollar. If capital is not allocated efficiently, we will never beat the US.

      On top of this we now have created the moral hazard that everybody believes he will be bailed out. This leads that everybody is abandoning aspiration to be like the A-students and will behave more like the C-students.

      I do not blame the Greek citizens of not performing. I know it is the system in Greece. Some of the brighest the people I know are Greeks. A lot of them moves to the US however and the ones who stayed in Greece rarely work for corporations where there brainpower would be leveraged. The prefer to be a low tax one man show (self employed).

      I always beleived that it makes sense to make a lot of of money and that I have to take paying taxes as a given. You know what, this Euro crisis has changed that. Why should I work a lot and pay a lot of taxes so that the reckless German government can distribute money to GR, PT and IE? I need about 25% of my net salary to maintain my standard of living. I can afford to work a lot less, have a good life. Noone can take that away from me.

  4. >>>Then again, it would be a calamitous development for
    >>>German export industry.

    Maybe not. The German export indistry was #1 when before the Euro. Do we are a happy #3 after the Euro.

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  6. Pingback: EU – Incredible Threat of Greece’s forced exit | Contrarian Fodder

  7. Few things:
    a) Where does the 190 billion euro figure come from? Seems a bit rich

    b) A german bank has the choice of accepting (or not) a Euro deposit and will most certainly repay it back in Euros and not in New Marks ( its a private contract that cannot be affected by a government decision)

    c) the FX effect on Greek exports to Germany is the same if there is a New Drachma or if there is a New Mark, the economic effect how knows…

    The question you pose (expulsion of Greece from the Euro) is a red herring, the risk is that Greece chooses to drop the Euro, but I do not think that this is an issue yet, the constituency in Greece that wants the Euro (consumers and people with wealth in Greece, houses etc) is much larger than the ones that one a cheaper currency (exporters, tourism)

    On you modest proposal , not sure what the notion of transfer of the bonds to the ECB books means: would they be assets of the ECB or liabilities of the ECB? Also not clear how your bond maths work in the examples( seem a bit off…)

    • The best solution would be that Germany gets out of the Euro. This would allow GR, PT & IE & ES to pressure the ECB to start to print money. –> Debt is inflated away.

      It would be very easy to get enough supporters for this exit in Germany. In case some other countries (NL, FI, LU, SK, AT) want to follow Germany there would even be the option for a new common currency among those countries.

      So the positives ar ecombined. One side gets rid of its debt and the other side des not have to enter into huge amounts of debt guarantees that are mildly said a crime against the taxpayers and will only lead to nationalistic tendencies in the northern countries.

    • Where I agree with you is that Germany can get out and, as is obvious, many Germans will be all too happy to see the DM reestablished. Then again, it would be a calamitous development for German export industry.

  8. I still do not get why there is not cost fro DE, NL, FI, AT etc. when the ECB issues bonds on behalf of all member states. The result will be a gigher interest rate for countries that would get cheaper financing by going directly to the market and lower interest rates for the other countries.

    In addition, if a country fails on its loans to the ECB, the other member states have to pay. This potentially is a huge cost and gets bigger over time. Why should any country keep its finances in order if it knows it will be bailed out?

    The result will be a convergence to the fiscal policies conducted in the south of Europe.

    Noone here mentions that it is a breach of the treaty of Lisboa to bail out other countries. Noone most likely knows that Merkel/Schäuble breached the German constitution with these bailouts. Unfortunately they will never go to jail for it, but we will see in fall what the surpreme court ruling be. It could mean the end ofthe Euro.

    Europe was a great palce to live before the Euro, so we will also be fine without it. Be it in Athens, Frankfurt or Helsinki.

  9. Certainly a perplexing debacle unfolding for the Euro, not unlike a Stanley Kubrick movie I think. It’s a tightening of the screw but not without reason. There’s too much of the deliberate in this “leaked rumor” to be of any real value. You are right, Greece out of the Euro has too many far reaching consequences to even be considered at the moment, but I think this was put out for a more deep-rooted agenda. More financial than political, and possibly a bit of a wake-up call to a couple of other countries out there who are hanging on the financial limb e.i. Ireland and Portugal.
    My opinion is that these statements are meant to drive intrinsic value of certain commodities up and boost currency in Asia and North America to within parity of the Euro, it seems like a strange move but Merkel is a smart old cow and she’s got more than just a few tricks up her sleeves. I honestly feel like this rumor is meant to be a bit a warning to others.
    These rumors and the ongoing crisis in Greece has driven gold to a new 3 month high last week with GC June contracts closing at $1526 with projections still on target for $1577 come first few weeks of June and closing at a little over $1600 entering into July – and this was even before these rumors came out – not to mention growth on crude oil and silver too; it’s just going to get uphill over the coming months.

  10. “How to go to their Parliaments after a year and request another 60 billion euros on Greece’s behalf after a few short months of having secrured 110 billion with false promises of ‘ring-fencing’ Greece, of returning Greece to markets by 2011 etc. They know that, in their own political parties, cabinet, Parliament, there will be great resistance to the new loans. So, to overcome such spirited resistance in all four capitals, they must have some bone to throw at their own functionaries; somethine the latter can then throw at their own dispondent electorates to create the necessary consensus.”

    They do have a bone, but outside of the UK government, many will not know of its existence and I must first apologise for again introducing my own thinking here, but as an unfunded British inventor; present circumstances demand that I take every chance I can get.

    We can all agree that a large part of the problem has been caused by banks lending excessive funds to governments such as Greece, who in turn, have no other mechanism to hand other than to create “government” inspired jobs. What everyone needs is a way to fund the creation of millions of non-government inspired jobs. In essence, there is a proposal on the table at the moment, that directs everyone to consider the creation of a new form of bond; a “Vanishing Bond”. The underlying principle being that we need to find a way to transfer out of the financial system, a vast quantity of very poor quality, (grossly over-leveraged), paper debt in the form of bonds.

    What is proposed is to take the junk and replace it with a vanishing bond that is entirely focused upon capitalising very small private sector, free enterprise job creation, under a very strict set of rules that everyone can both understand and agree upon. The whole concept is stalled at the moment as; as things stand, the pump priming will have to come from others agreeing to reimburse me for royalties for telecom patents I own which are currently for sale.

    In effect, the plan is to transfer, (for example, here in the UK), £450 billion, from existing bonds back into the grass roots as new equity capital investment into new jobs where the bonds “vanish” instead of remaining in system, expecting an ongoing return. The same principles can easily be applied to any nation, Greece being a very good example. Indeed, Greece might very well be the best starting point for such a program.

    But is there any support among Greek intellectuals for such a radical idea?


  11. Why does not speak any European parlementarian or media about the coming ASEAN Community in 2015?
    Are they so scared of this community that they make a big theater of the (little compared to other countries) debts of Greece, so they do not need to talk or think about the consequences of this comming community?
    In politics is important about what is talked, but also what they do not tell you.

    I believe an EU divided in euzone and not euro-zone, without being a political community but especcially without the feeling of EU-citizens being a EU-citizen – (due to a lack of cultural and historical information about all the member states, so integration will not succeed) – can never compete with this East-Asian Community. Especcially not because this Community is supported by China, Japan and South-Korea (so called ASEAN+3). These 13 countries are now talking about a common currency.


    Roadmap for ASEAN Community 2009-2015

    Cooperation programm ASEAN plus three 2007-2017

    documents about ASEAN + 3 since 2002(!!!!)

    About Greece I know something about the history: the corrupt kings and the corrupt American financial help to the colonels’ dictatureship.
    In a German book about Mikis Theodorakis I could read that money of Greek taxpayers went to the campaign of Richard Nixon.
    i think: the European countries and USA should pay back all the money they stole from the Greeks since the working of the Treatment of Jalta.
    They installed a corrupt German king on the greek throne, so who was introducing a corrupt system in Greece?
    The king went after a referendum but not the corrupt system.

    I even believe a economical community based on the philosophy of competition between member states and not on cooperation, is totally outdated.

  12. When will ‘they’ stop to shoot their feet?

    When ‘they’ will have no more feet to shoot…

    “Those whom the gods wish to destroy they first make mad.”

    I’d rather be a walker than a foot…

  13. The only thing is that the Greek PM will never do this Friday vote in the Greek parliament. We will have to “kick” him out of the parliament asap.

  14. Brother – Two details appeared in the FT article published Sunday night, which you leave off: (1) the IMF imposed its own condition – withholding its next payment tranche unless Athens has a credible plan quote-unquote for the next 12 months; (2) that as much as half of the new financing needed in the period through end-2013 will come from readjusted terms for existing creditors.

    So the IMF plays the role of “heat” or “heavy” – ‘he’s crazy and he has a loaded gun’. And there is a quiet haircut in the to-be-negotiated terms. Democracy in action?

    • Brother Gary, I never thought the moment would come when I would defend (even for a passing second) the IMF but, alas, it has come: What its hapless functionaries have said makes perfect sense: They cannot hand out more money to Athens in June 2011 as part of a multiple year support project (the purpose of which is to prevent a Greek soveriegn default) when it is, presently, clear that unless the EU comes up with a new funding formula for Greece, the country will deafult in 2012 even if it receives the OMF’s funds now. Effectively, the IMF is telling the Europeans: Guys, get your house in order. When and only when you do can you expect more money from us. Reasonable, don’t you think? As for the FT report concerning the need for ” readjusted terms for existing creditors” this is yet another euphemism for a debt restructure. This is right too. What the FT is reporting, in an admittedly candid manner, is that the EU cannot have its cake and eat it. If it does not find a way to unify part of the debt mountain weighing the eurozone’s periphery down (e.g. by issuing a eurobond, as we suggest in the Modest Proposal), the debt is so enormous that it will have to be restructured (however powerfully the ECB is kicking and screaming). While none of this is part of an IMT-Financial Times drive toward greater democracy, it is at least a position not totally devoid of logic. In sharp contrast, the EU’s position and practices is both undemocratic and idiotic…

  15. I agree with Anna. When the economy was “working” people were quite happy not to pay their taxes, work in protective professions or work in public administration. But since 2008 that model functions. Greek society has to accept its role in the debacle and it must change its ways.

    • Correction
      I clearly meant that since 2008 the Greek model does NOT work

    • Nor does the European model, I am very much afraid. Even if a cruel (or compassionate?) God were to erase Greece from the planet’s surface, the European crisis would continue. Think about it: If Ireland (which was a model country by your exalted standards; free of corruption, tax evasion etc.) is sitting on the same dock as Greece, there is something rotten in the Kingdom of Europe, don’t you think?

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  17. I agree with every point in the chain of events of your catastrophic ‘ND’ scenario except with its starting point.
    The blackmail – which amounts to an Ultimatum reiterated with increasing severity at the end of every quarter whenever an instalment (this time, the fifth) from the 110bn euro loan is due for approval by the troika – entails the certainty of a disorderly Greek DEFAULT the moment the scheduled instalment is withheld.
    In other words, the Ultimatum on Greece (the first of such weight since 1940) is also an ultimatum on Europe, every time Mr Thomsen or Herr Stark gnash their teeth to the Greeks: “surrender to our diktat or default”.
    And no Greek government – especially one as compromised as the present one – needs to “bite the bullet” to slip into the abyss, merely for failing to meet impossible and self-defeating conditions set by its creditors.
    After the Armageddon of a Greek default and its global repercussions, which you have enumerated with astute precision, there will be no Euro left to lean back on, and no viable new drachma either.
    Only some form of global fiat currency (the Ameuro or Eudollar?), based on a common denominator of grossly undervalued “hard” currencies is “predicted” to take their place amidst the ruins.
    But at the moment, it seems that the barons of high finance in Frankfurt and New York are not yet fully prepared to pull the plug simultaneously on Greece, the euro and some 60-trillion-dollar worth of toxic financial bubbles (including sovereign euro debt) left in dormant bank or hedge-fund accounts and CDS/CDO ‘exposure’ since the Lehmann Brothers debacle.
    But with every reissuance of their Ultimatum, they manage to eliminate one counterveiling force to their plans after another (as they did with DSK and his pipedream of an SDR-based global reserve currency – and as they now threaten to do with the last remaining friend of Greece, Wolfgang Schaeuble, unless he stops mumbling about the need for a debt restructure).
    At every turn, they also manage to extract full and unquestioned compliance from their erstwhile ‘free-thinking’ pawns, old and new (be it ECB bigshots or assorted wannabe IMF chiefs).
    So, unless a full-fledged European alternative (like your Modest Proposal) is pushed through with resolve and urgency, the countdown to your “incredible” catastrophic scenario will remain on the cards.
    We can’t afford the complacency of thinking that it will not or – worse – that it never was.
    No wonder your M-P has already won some valuable new recruits in Belgium over this weekend.
    However, it needs a steering committee of public individuals and like-minded folks to lobby for it as widely, effectively and continuously as possible, instead of consuming themselves in semantic refinements or in rebuttals of the pro-troika and anti-euro crowds.
    Start it off with Stuart, and we (I suppose Y-patia Krimbas and myself at the moment) shall sign up to it unconditionally.

    • Can anyone explain to me why the modest proposal does not cist the taxpayers of DE, NL & FI any money?
      I assume the interest rate at which the ECB would borrow will be above what DE, NL & FI pay today. So who pays the delta?

      There is no free lunch!

      “The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.”
      Warren Buffett

    • Since you asked, let me explain: The ECB bonds that we envisage will sell at rates less than 3% and have no effect whatsoever on the rates at which DE, NL and Fl borrow. Why? Because international investors (e.g. Chinese Sovereign Wealth Funds) are desperate for good quality paper that can help them diversify away from US Treasuries. The ECB has a solid reputation and its bonds will be massively oversubscribed. So, in answer to your question “Who pays the delta?” the answer is (agreeing entirely with the time honoured dictum that “there is no such thing as a free lunch”): The ECB acts as a go between international investors and Europe’s member-states, thus securing better terms for them but only for the part of their debt that is Maastricht compliant (therefore not raising moral hazard concerns). Two additional supprting arguments: (1) Even the highly problematic (almost toxic) EFSF secures extremely low interest rates when raising money to fund the ill-conceived bail-outs for Ireland and Portugal. (2) President Roosevelt utilised US Treasury Bills in order to finance recovery not by lending money to the different states (or having California guarantee expensive loans for Illinois) but by using the US’ clout in the international markets to act as a lever of investment and recovery. Permit me to say that your thinking could do with a Gestalt Shift…

    • I wish I could disagree forcefully with you. All I can is to present a feeble and half-hearted suggestion that there may be more nous in Frankfurt and New York than you acknowledge. But then again there may not…

    • You are certainly onto something. However, I would put it slightly differently: Debt is a means by which to transfer value not already produced from the future into the present. Presently, we have tried to transfer too much, the result being that existing capital does not find the return that would justify its existence. Thus the Crisis…

  18. I think the bulk of problem must come from Greece nation
    otherwise implications on Eurozone as mounted today will be substantial.In a 5-7 year period with right composition of measurements to be taken Greece can come out strengthen and credit worthy with housebalance in order.I refer to recent article in WELT ONLINE.
    Was die Griechen von den Deutschen lernen sollten.
    Conclusion:Restore Financial stability and good houskeeping key efforts to regain International confidance for Eurozone.Political consensus from Greece
    on action plan “To be or not To be”?
    Active Trader

    • Dear Lennart, the whole point is that Greece cannot do this. No matter how hard a national economy tries to reform itself, and bring its finances in order, when caught in a vicious triple crisis (debt-banking-recession), without even having the capacity to devalue its currency, the only way is down, down and further down. And since (if my post was accurate) Greece cannot (even if it wants to) exit the common currency (without bringing it down with it), the “bulk of the problem” does not fall just on Greece but is shared by the whole of the eurozone. In short, I have some terrible news for you: Greeece’s problem cannot be decoupled from those of the rest of the eurozone. But such is life in any currency union. Moreover, it works both ways: A country whose long term growth depends on maintaining large trade surpluses with its partners is as much a problem for a currency union as one that is generating chronic deficits…

  19. I completely agree that the scenarios you paint are the ones that would occur, and you described them. But…if the Germans responded as you say they would in para 7 above eg., by aiding Greece and recapitalizing their own banks, then they would be doing precisely what they would be trying to avoid and thus pushing Greece out. If they are willing to do what you say, it would not be necssary for Greece to leave.

    • Precisely! Thus, the only issue that is now taxing the best and the brightest in Berlin is how best to keep the show on the road, and in particular how to deal with what I call the Great Banking Conundrum…

  20. Furthermore, any eurozone country exit form the euro is not just an exit from a monetary union. The Euro is part of the EU institutional framework although not all the EU countries belong to the eurozone. As explained by Luigi Spaventa in MIlan’s Il Corriere della Sera last year, exit from the eurozone entails an exit from the European Union. This eventaulity is totally opposed also by Germany, unless… something is changing there also in relation to the EU as such.

    • This is a crucial point. Joseph is highlighting the political defeat for the very idea of a European Union that a gradual dismantling of the eurozone will trigger. Germany is (or ought to be) painfully aware of it. Otherwise a postmodern 1930s will dawn upon a continent that ought to know better.

  21. If they only wanted to solve the debt problem and keep the Euro down they could just adopt a simplified version of your modest proposal isn’t it?i.e. make ECB buy 0\\= in fear allegedly of a default – as much Greek and other ailing paper as possible, then write-off all of this tranche of debt, and avoid in this way any haircut on private investors and pension funds the ECB making itself momentarily insolvent. Through printing money it would keep the Euro exchange rate perhaps below parity with the Dollar as it would be re-capitaliasing itself by some form of Quantitative Re-plenishing (they like the Re- prefix in Europe…).But they will not do it before they see the last hospital they can close closedand the last ophanage take the orphans under the bridges for shelter…Am I so off the mark thinking they are just imposing incredible austerity and above all money transfers and that they are not playing (misguided) “constructive destruction???”

    • I like Yannis’ reasoning and exposing of some unfounded statements. But I would not go down a slipperly slope of accusing ‘they’ (who is the ‘they’) of deliberately tyrinig to make people suffer in Greece. The problems of the country are largely of our own making. What I think Yanis and other people have been arguing is that the solution to the problem was misguided because it did not take into account the features of the Greek economy and society. having said this there is a lot to say about the Greek government lacking the courage to implement some reforms while carrying forward other refors (e.g. what about opeining up the famous closed professions), and about Greek citizens having become ‘strouthokamiloi’ (cant’t remember right now the work in English) – many of us have dug their head deep in the sand and pretend they do not see the collapse coming. everybody is angry at the governmenbt and the creditors and the ECB etc. but forget to see what they have been doing wrong. but I do not want to open up again a rather old discussion. Let’s see what the future holds for us. I hope not the exit from the Euro. but I donot know what kind of ‘controlled’ ‘bankruptcy’ can there be??….

    • Dear Anna, two responses:

      First, the answer to your question “Who are they?” is terribly easy to answer: The leaders of the four surplus countries (Germany, Holland, Austria and Finland) plus the President of the pretend triple-A rated country (France). Do not get me wrong. I do not think they “have it in” for Greece or for the Greeks. What they have in their hands is a very hot political potato (of their own making, mind you): How to go to their Parliaments after a year and request another 60 billion euros on Greece’s behalf after a few short months of having secrured 110 billion with false promises of ‘ring-fencing’ Greece, of returning Greece to markets by 2011 etc. They know that, in their own political parties, cabinet, Parliament, there will be great resistance to the new loans. So, to overcome such spirited resistance in all four capitals, they must have some bone to throw at their own functionaries; somethine the latter can then throw at their own dispondent electorates to create the necessary consensus. As even the least qualified anthropologist knows, at such moments a little bit of suffering and scapegoating of the aid recipient goes a long way. The opportunity to report that the Greeks sold off in short order, and on the cheap, an electricity grid that it took generations to put together; the news that the Greeks gave up ownership of airports, ports, valued land etc.; the sight of a Greek PM in visible distress; a fast rising poverty rate in Greece; all these ‘news would carry enormous symbolic value in these Parliaments/cabinets/ electorates and might just help Mrs Merkel et al secure the loans that Greece must have to continue a little longer on the current unsustainable path.

      Secondly, I am startled by your observation “The problems of the country are largely of our own making.” Let reverse your own (earlier) question: “Who on earth are we?” Just like I would never generalise vis-a-vis the Germans or the Chinese for that matter (being a true believer in the proposition that there is more variation between a nation than across nations), I will be damned if I generalise about us Greeks either. The whole world, dear Anna, spent the past twenty five years digging, as you write, “their head deep in the sand and pretend they do not see the collapse coming”. We are all in it together. The sin is evenly spread across the whole planet. From California and Miami to the City of London and from today’s Shanghai to Athens: The global economy was living on the thin crust of a bubble (and a significant part if still doing it – my recent visit in booming bubble-ridden Australia confirmed this). Returning to Greece, let us not forget that even before the crisis struck, official poverty rates were the highest (by far) in the Eurozone and only second (after Latvia) in the Europe of 27 nations. To portray Greeks, wholesale, as spendthrift over-reachers is to fall prey to the worst instincts of the tabloid press (and equivalent, in reverse, to celebrating Greeks as somehow superior to all others – a trait of Greek nationalists).

      In short, if this crisis has revealed anything it is that Europe has failed singularly to look at itself in the Crisis’ unforgiving mirror, reflect and try to remodel itself in a manner consistent with its supposed interest in builiding a Union. Instead, it is indulging in scapegoating, generalisations and a beggar-thy-neighbour policy that can only lead to a postmodern Hobbesian war of all against all.

    • To Anna Triantafyllidou: “They” are the (Germany controlled) eurozone, the ECB, and IMF. They are all trying to absorb gains from Greece’s debt crisis, and inforce fiscal policy, regardless of any constitution or EU law, to free democratic countries that are in a debt crisis. This kind of monetary union has no reason to exist. We (the Greeks) will be better out of this union.

      As for your “opeining up the closed professions”, this will happen when there is reason for big enough greek companies. Doing it earlier will just close middle and small scale businesses in Greece, and nothing good will come out of it except more poverty and less tax revenue (since we don’t tax significantly big companies –the foreign ones that may come).

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