Europe’s finance ministers had a chat yesterday about Greece. You might have heard about it. Didn’t go too well, by the sounds of things.
They hadn’t expected to come to any deal over Greece’s debt problems. But they had hoped they could agree a bit of an agenda for future talks at least (the next session is on Monday).
But it turns out they couldn’t even do that – they still can’t “even agree to disagree”, as the Greek finance minister Yanis Varoufakis put it a couple of days ago.
If this carries on, we could be looking at a ‘Grexit’ as early as March – so what would that mean?
It’s a bit late to be going on about moral hazard now
If either Greece or the rest of Europe (for which, read Germany) are in a mood for compromise, neither side is showing it.
I have a certain amount of sympathy for Germany. Their voters were conned into joining the euro just as much as everyone else’s. Yet they’re now being painted as the bad guys because they’re reluctant to subsidise voters in a different country.
But an opinion piece in the FT this morning from Jurgen Stark, a former representative of Germany on the European Central Bank’s board, goes a long way to diluting that sympathy.
Assuming the piece reflects his views fairly, it demonstrates a rigidity of thought, dismissal of political reality – and downright orneriness – that must have made dealing with the guy a nightmare.
Stark trots out the usual stuff about how it’s not Germany’s fault that Greece is a corrupt state that lived beyond its means. Europe is not politically integrated yet, he says, so there is “no constitutional basis for a higher level of transfer payments to weaker countries. Such payments anyway do not solve economic problems and they lead to moral hazard.”
Now, I worry about moral hazard as much as the next person – probably more, in fact. Economics is ultimately all about incentives, after all.
But the entire euro project is founded on moral hazard. Greece (and most of the others) joined partly so that they could borrow at German interest rates. Anyone who says they didn’t see that going in is either lying or being deliberately obtuse.
So you can’t now throw up your hands and say: “Nothing to do with us, guv – I didn’t realise this was going to happen.” At least, not if you want this silly, anti-democratic economic experiment to survive.
If Greece leaves, what’s the worst-case scenario?
But that point takes us back to what I discussed here the other day. Maybe this is all a face-saving exercise. Maybe Greece wants to leave, Germany wants it to go, and this is the equivalent of a divorcing couple trying to look like the most reasonable party in the inevitable split.
So let’s assume the chat on Monday doesn’t go any better than yesterday’s. What happens?
The basic issue is this: if Greece has all of its lifelines cut off by Europe – which will happen by the end of the month if they don’t come to some sort of agreement – its banks will be unable to function. That would force it to leave the eurozone.
What investment bank UBS worries about is that this fear could then spread to other European countries. UBS points out that there are two issues for other nations: will the eurozone stand behind their banking system? And – regardless of the answer to that – do bank depositors believe their country will leave the euro?
As UBS puts it: if you think there’s even a 5% chance of your country leaving the euro, it’s irrational to keep your savings there. They suggest that a return to the drachma would see the value of converted savings drop by 60%, for example. That’s the most extreme example, but I can’t see the rebooted peseta or escudo being much more sturdy in the first instance.
In effect, you’ve got what started to happen in Scotland ahead of the independence referendum – a silent bank run, where savers who were worried about potentially having their savings converted into a weaker currency started pulling money out of the banking system.
That then ends up being self-fulfilling, tipping countries into a crisis that Europe doesn’t have the political will or mechanisms to deal with.
And, as we’ve said before, if one of the biggies leaves – Spain or Italy – it could spell the end of the euro.
I’ll say again – I do think this is a worst-case scenario. Maybe I’m being complacent, but I still think that while a Greek exit would be a jolt, there are still plenty of options open to neutralise the worst of the knock-on impact.
But just in case, we’ve taken a look at ways you can insulate your portfolio against Grexit – and various other doomsday scenarios – in the latest issue of MoneyWeek magazine, out tomorrow. If you’re not already a subscriber, get your first four issues free here.
And if you’re less optimistic than I am, do have a look at my colleague Tim Price’s report on Europe and the risks a break-up poses to the UK – it’s all here.
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