After Round One

Commentators agree that this was a disastrous week for the Greek coalition government and its Finance Minister Yanis Varoufakis. The shot of lukewarm support they received from Paris and Rome was easily outflanked by the iron ‘No’ of German Finance Minister Schâuble to a all ideas of Varoufakis, and even more so by the decision of the governing council of the ECB to no longer accept Greek bonds as collateral. Not to talk about the further downgrading of Greek bonds by S&P. At the same time, the increase of Greece’s Target balance hints to further capital flight out of Greece, and this is also supported by the decrease of deposits at Greece’s commercial banks. All this is nothing else then a perfect storm, or?

I suggest that the Greek government is not a bit surprised about the outcome. The whirlwind trip through Europe was a necessary bow to Syria voters and to Greek public at large who are still very much in support of Greece’s membership in the Eurozone. According to Eurobarometer close to 60% of the adult population continues to think that the Eurozone is a good thing for Greece. It would have been political suicide not to talk to the core EU governments – and at the same time being well aware that those talks may need to nowhere. Even though most of the Syria government ministers are novices in running a national government I trust they are not naive and not totally blown away by their own campaign rhetoric. In other words, they have anticipated that their economic policy ideas will not get the support of Eurozone member governments. Thus it is now time to move to round two. Round two should be all about sticking to a comprehensive and radical societal reform plan and making clear that without EU support this plan only can become reality outside the Eurozone. Grexit is the next best option if the Greek government will keep its word. This nice graph from ‘The Economist’ shows in impressive ways that Greece is in all respects sub-par with its Eurozone fellow members.





Grexit comes down to a cool calculation of social, economic and political costs. Continuing the ‘extend and pretend’-policy of the past under whatever label of Troika-supervision as Schäuble demanded last week will only perpetuate the social and economic malaise. Leaving the Eurozone will come with an open default and the official ban of Greece from private credit markets. Greece would have to return to its own national currency that would quickly depreciate. Whether a  defaulted Greece can still retain its EU membership is as much a legal as it is a political question. Given that the vast majority of Greek public is held by foreign officials (another Economist graph), it seems to me that EU fellow members should be interested to keep Greece in the Eurozone. Sure, they would all be able to suck up default costs but costs those are. Not to talk about the uncertainty of contagion. Greece’s coalition government is not yet ready to turn seriously to the Grexit option. Actually, for domestic political reasons they prefer as second best a development where the EU is the bad guy who does not want to compromise. There result of this constellation may be a compromise of radical reforms in exchange for a partial debt swap and growth stimulation.