Whither Greece?

Includes: EU, GREK
by: Brian Romanchuk

Despite the rather excitable headlines, some variant of a can-kicking exercise for Greece still seems like a plausible outcome. The reality is that there is no mechanism to stop Greece from using the euro (but see comment below), and the EU has limited ability to effect a regime change in Greece after the referendum victory. The only plausible durable solution is for Greece to exit, but the Greeks broadly wish to avoid that outcome. The situation will slowly simmer, at least until there is a broader downturn elsewhere. A Chinese stock market crash could be a trigger, but it would need to be validated with effects in the real economy.

Bill Mitchell's Take

The Australian academic Bill Mitchell (who you could describe as one of the "founders" of MMT) gives an analysis which is closest to my views in this article. I am just finishing his book on the eurozone, and I may review it shortly, given its relevance.

He argues that the ECB is failing its mandates by squeezing the Greek banking system. The allegedly independent central bank is acting as an enforcer of a particular partisan brand of politics. If it persists, the Greek government could plausibly take it its case to the European courts, and use its emergency powers in the interim. Given the precedents set by the ECB's treatment of other peripheral countries, the hardliners face the possibility of being utterly defeated in a court ruling.

There is a lot of mistaken "expert" analysis out there that relies on quoting random bits of European treaties. The reality is that international law is a fuzzy concept, and it continuously adapts to the conditions on the ground. This is why the French and Germans were able to avoid the Excessive Deficit Procedures in 2003, even though any commonsense application of the rules would have applied to them. At the end of the day, what happens in the euro area will be driven by the political trends between the major powers. Unless the Greek government capitulates, the constellation of diplomatic alignments still appears to favour "muddling through."

In any event, there are limited mechanisms to force Greece to capitulate. The current strategy of strangling the banking system could just lead to them being nationalised by the government. Who know what shenanigans would be unearthed if government auditors went over the banks' books? Although I am hardly an expert on Syriza's politics, such a nationalisation might actually be on the wish list of its hard left faction. Meanwhile, there is no mechanism to eject Greece from the euro. Cutting Greece off from TARGET2 would effectively create a new currency, but at the same time, it is unclear whether that would stand up well in court.

A Good Crisis Would Focus Everyone's Minds On Finding A Solution

From the perspective of the unemployed in Greece (and other peripheral nations), the current situation is a disaster which is worse than the experience of the United States in the Great Depression. However, other countries are doing relatively well, and so the sclerotic European diplomacy has no reason to find a solution. This might change if the global economy starts to implode. The euro area would be driven into complete disarray if Germany's trade-driven growth strategy goes into reverse.

The current global expansion is long in the tooth, and a reversal at some point is inevitable. The United States is barely growing, and other countries outside of Europe are also near stall speed (such as Canada). A purging of the bubble excesses in China would do a job of wiping out global demand. As a result, the collapse in the Chinese stock market (which was halted today as a result of government intervention) bears watching. That said, calling the Chinese stock market a casino is an insult to the rationality of the gamblers at most casinos. A stock market crash will only matter if there is a link to investment in the real economy (and not the largely fantastical notion of the "wealth effect").

A collapse in demand emanating out of China will reconvert a lot of hardline austerians into Keynesians, as was the case in 2008. This might allow the eurozone to come up with an economic plan that might actually work.