By Matthew Lynn
Blazing rows played out in public. Accusations of bad faith and dishonesty. Deadlines missed and negotiations that go on forever. A falling out over money, with old debts raked over and thrown back in everyone’s face.
If Greece and its eurozone partners were a family of humans rather than nations, even the most indulgent psychotherapist would probably tell them all to pack it in and stop trying to pretend they could exist under the same roof.
And yet, despite that, the Greeks are not about to be thrown out of the club. Deadlines will come and go, and the rows will never stop. But the one thing investors need to know is that the eurozone is not about to let the country leave. Why not? Because it would change the euro EURUSD, +0.0620% forever, and not for the better. No matter how bad the relationship gets, a compromise will always be worked out.
In the last few days, the Greek drama has reached new heights of bitterness. Over the weekend, the president of the European Commission, Jean-Claude Juncker, who has been trying to broker a compromise, accused Greek Prime Minister Alexis Tsipras of going back on his word.
“I do not have a personal problem with Alexis Tsipras,” he said. “He is my friend. But frankly, in order to maintain the friendship, he has to observe some minimum rules.” In response, Tsipras hit back with a warning that a failure to reach a deal with his country would bring the whole edifice crashing down. “It would be the beginning of the end of the eurozone,” he told the Italian paper Corriere della Sera. “If Greece fails, the markets will immediately go to look for the next one. If negotiations fail, the cost for European taxpayers would be enormous.”
The nub of the conflict is the same as it has always been. Greece has failed to adapt to the requirements of sharing a currency with German and France, and the rest of the continent has failed to dig deep enough into its pockets to keep its Southern neighbor afloat. The result has been an economic depression of the sort the developed world has not seen since the 1930s, and a debt burden that has spiralled out of control, reaching 180% of gross domestic product on the latest measures.
Greece has already skipped one payment to the International Monetary Fund and has to pay billions more over the summer to stay afloat. But the rest of the EU is not willing to hand over yet more money to Greece unless the government presses on with cuts to public spending, increases taxes, and keeps on reforming an economy wrapped up in red tape and restrictive practices — even though Tsipras’s Syriza party was elected precisely to reverse those reforms.
If a deal can’t be struck, the risk is that Greece will tumble out of the currency — which is why Greek bond yields have been spiking upwards once again.
It is easy to see what the risks are, and that is understandably making the markets nervous. And yet it is also import to focus on the factors binding these countries together. “A good rule is that once a family disowns a child, the family is never quite the same again,” argued former U.S. Treasury Secretary Lawrence Summers in a talk at the Amundi World Investment Forum in Paris last week. “If a country leaves the euro, that is also the case.”
That is certainly true. In reality there are two factors keeping Greece in the single currency — and which will force the rest of Europe to keep bailing out the country no mater how badly it behaves.
The first, as Summers quite rightly observed, is that this is not just an economic arrangement. It is also a family. If Greece is allowed to go, it will change the nature of the single currency forever. It will no longer be a genuine community of nations that have pooled their financial assets. It would be a fixed exchange-rate regime, of the sort that have failed countless times in the past.
No one doubts that New York and California would bail out Texas in a crisis, although there might be a lot of grumbling. London and Manchester would bail out Wales if they had to. If eurozone states are not willing to help one another then it becomes a far looser, less formal monetary union, and one that is far less likely to succeed in the long term.
The European Union would be wracked by doubt, and would feel guilty about what it has done to Greece for years and perhaps decades afterwards. It might survive that, but it would be rash to count on it.
The second is contagion. For all the firewalls put in place, no one really knows what the consequences of Greece coming out of the euro might be. “Greece’s default would be a Lehman-class financial failure,” argued High Frequency Economics in a note this week. “When things this big break, no one can be sure of the unanticipated consequences.”
Very true. Greece might only account for a relatively trivial 3% of the eurozone’s total GDP — so that even if it disappeared completely, a single year of decent growth could replace the lost output — but no one knows precisely where all its debts are, or what the impact of losing that money would be.
Leaders on both sides will grow increasingly angry with one another. But when it comes to the crunch, both sides have too much at stake to walk away.
The eurozone is a dysfunctional family, whose members have far too little in common with one another. But as most of us know from personal experience, even the most dysfunctional of families can stick together for a remarkably long time.
The end point will come one day. But that is still some way off — and until it is a lot closer, investors can safely ignore all the noise.
