On Monday the European Central Bank’s deadline for Greece to submit a realistic reform plan expired. On Tuesday Greece submitted a plan long on assumptions and short on details, one that included higher spending on pensions and an increase in the minimum wage. What comes next?
I find myself in pretty substantial disagreement with many of the comments I’ve read about a possible Greek exit from the European Union. Here is my read on three common beliefs:
1) When push comes to shove, Germany will do whatever is necessary to keep Greece in the EU. I disagree. When push comes to shove, Germany will do what is necessary to keep from being the perpetual banker for the improvident weak sisters of the EU. Merkel believes she can avoid being the deep pockets while keeping the Eurozone substantially intact. In the short run (Greece only), I think she is right.
2) Greece leaving will set a dangerous precedent, leading other nations to abandon the Euro. Really doubtful. Greece out of the Euro will be an absolute economic basket case. Far from encouraging other EU countries to exit the common currency, observing Greece spiraling into dissolution, while hitched to the falling star of bankrupt, brutal Russia, will be an object lesson for other nations with structural deficit issues. Even the Greeks understand this. As a Greek economics professor observed last year, “Outside of the EU, Greece is Africa.”
3) The bold Socialists of Syriza will be able to negotiate a better deal. You can’t make a better bargain if you hold no bargaining chips. In reality, Greece has no negotiating room. Greece’s only card to play is leaving the Euro. But every time Greece threatens a default (which amounts to an exit), it triggers a further run on Greek banks, already close to insolvent. There are two rules about bank runs: 1) Avoid a bank run at all costs. In a panic, everyone loses. 2) If there is a run, make sure you panic first. Only then will you get your money. Greeks will panic and withdraw their money. They have to.
So here is my uncharacteristically bold prediction. Greece will fail to extract any meaningful concessions from Germany and the ECB. Their flirtation with Putin’s Russia will harden sentiment against them. Due to poor message discipline, they will trigger larger bank runs, and Greek banks will become insolvent. Whether they choose to leave the EU or are pitched out does not matter. They are gone. Outside the EU, Greece will find itself in immediate economic freefall.
Here’s a further contrarian prediction. Greece’s exit will be a relative non-event for Europe as a whole, and for its banks. Against expectations, European markets will rally within weeks, and possibly within days. (For compliance reasons, I hasten to add that this is my personal prediction, that it in no way represents a promise or a guarantee, and should not form the basis for buying or selling any investment.)