Worries about Greece’s immediate eurozone exit are extremely overblown

Earlier this week, as the chances of a pro-bailout Greek coalition fell apart, you would think that the failure to cobble together a coalition was tantamount to Greece withdrawing from the euro and reintroducing the drachma.

Sure enough, signs of a “bank jog” emerged this week, as Greeks pulled out over €1.2 billion in deposits from Greek banks on Monday and Tuesday amid the political tumult.  An article in Der Spiegel declared that it is time for Greece to leave the euro and even Christine Lagarde, managing director of the International Monetary Fund said that, although it would be “quite messy,” it is time to start thinking about how to engineer a Greek exit from the euro.

But with an interim caretaker prime minister, Panagiotis Pikrammenos, being sworn in today, and new elections scheduled for just over a month from today, the warnings of Greece’s immediate exit from the eurozone are extremely overblown.

Let’s leave aside whether a “Grexit” would cause a Lehman-style chain reaction that collapses Portugal, then Ireland, then Spain, then Italy, then Belgium, then the core of the eurozone, like so many dominoes.

Let’s leave aside the mechanics for how a country exists the eurozone — the revaluation issues, the requisite currency controls, potential bank runs throughout the eurozone, the impact on private bank balance sheets (both inside and outside Greece), how Greece would finance its debt without European and IMF bailout funds.

Let’s also leave aside whether, by allowing the Greeks to devalue their currency, boosting exports and GDP growth and to introduce a monetary policy suitable for the Greek economy, a return to the drachma would actually be the best economic medicine for Greece (this, of course, makes it more likely that Greece will eventually exit the eurozone, perhaps, but not today or tomorrow or even next month).

As FT Alphaville notes, the real surprise isn’t the “bank jog” itself, but at just how much capital has remained in Greek banks since the sovereign debt crisis began:

The amazing thing about the Greek banking system since 2009 is not just the 25 to 30 per cent of deposits that have left, but the 70-75 per cent which have stayed. They have stayed through two years of Greece transparently getting closer to leaving the euro and turning these deposits into drachma.

Furthermore, post-election wrangling is not unnatural following a European election — think of the 541 days it took for Belgium to form a government or of the four months it took for the last Dutch coalition to be formed.  Greeks will return to the polls within six weeks of the original election, and polls show the result could be more decisive the second time around.  That’s a lot faster than the Dutch or the Belgians.

If polls are accurate, both of the “pro-bailout” parties, the center-right New Democracy and the center-left PASOK, will lose support from May 6, and the “anti-austerity” SYRIZA coalition will gain — and gain a lot.  But it also means that the firmly “anti-euro” KKE (Greek Communist Party) and the neofascist and anti-Europe Golden Dawn will also do a lot more poorly, which is good news from a “European” perspective.

Moreover, the vote of over 70% of Greek voters, some for SYRIZA, but across the entire spectrum from extreme right to far left, demonstrates an outright rejection of PASOK and New Democracy as the two sclerotic, ineffective and nepotistic parties that, together over nearly four decades, mired Greece in its current regulatory and financial straits.

In the “worst-case” scenario on June 17, Alexis Tsipras and his SYRIZA coalition will win the election with enough strength to pull together an anti-austerity government with allies such as the Democratic Left, perhaps the Independent Greeks, perhaps the Ecological Greens (they just narrowly missed the 3% mark on May 6 for representation in parliament) and perhaps even PASOK itself, which has traditionally been the standard-bearer of the Greek left.

But Tsipras is and has always been very much a pro-euro politician, even if bitterly opposed to the terms of Greece’s current bailout package.  Tsipras’s aim has never been to pull Greece out of the eurozone or out of the European Union, but to rip up the existing framework for Greece’s bailout and renegotiate a less severe path forward.  Even the most ardent proponents of austerity agree that Greece is in somewhat of a death spiral — the budget cuts are exacerbating Greece’s recession, leading to lower growth and higher unemployment, thereby leading to even lower revenues.  So at a time when Greece is undergoing extensive budget cuts, its budget deficit is actually growing larger.

Once in power, even radicals have a way of moderating their concerns.  I’m sure we’ll see many rounds of brinksmanship over Greece’s future in the eurozone, but ultimately, Tsipras is seeking leverage to achieve some amount of relief for Greece’s economy, which means that Greece’s future in the eurozone is just as much in the hands of Germany and France.  If the wealthier members of the eurozone want to retain the eurozone’s current composition, they will either have to provide much more generous fiscal transfers to Greece (and Spain and Portugal and so on) or the European Central Bank will have to adopt a much more expansionary monetary policy — the introduction of “eurobonds,” lower interest rates across the eurozone, a higher inflation target, or all of the above.

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