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Beware Grexit 2: In finance, as in movies, sequels get bloodier, faster

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During the last weeks, many observers have indicated that the Eurozone was now much stronger and could bear easily a Greek exit. This could reveal more about their calm and warm environment than about the political and social reality of 2015.



Beware Grexit 2: In finance, as in movies, sequels get bloodier, faster

In movies, great sequels tend to be bloodier than the originals. In The Godfather: Part II, you see in parallel the rise of Corleone Sr in the 1920s and Corleone Jr in the 1950s, and both paths rapidly become murderous. In Aliens, the predatory creature is replaced by a bunch of predatory creatures. Much more lethal. And in Jaws 2, the big white shark is transformed into a much bigger grey shark.

In finance, the degree of bloodiness of sequels depends on what people have learned from the previous crises. From this point of view, the learning curve of the eurozone managers fails to impress, to say the least. After more than six years, our wise men (and women) have basically managed to elaborate a fiscal union that’s extremely light, a banking union that’s very light, and a monetary policy that’s also pretty light considering the nearly nonexistent rate of inflation: A strategy repeatedly criticized as too weak by all competent international economic institutions. Rightly, it seems. The eurozone GDP remains lower than in 2008. Public debt is still climbing. The global debt level is still rising. Productivity remains abnormally low. Unemployment remains abnormally high. This does not strike one as a particularly impressive success story.

In the run up to the next Greek election, comments have been are flying around claiming that the Greek exit from the eurozone would now be much less dangerous for Europe, that there is no need for a strategy change, and finally that a Grexit would be quite a good warning for other ‘irresponsible’ governments (Financial Times, 11 December 2014, Spiegel, 3 January 2015, Le Monde, 4 January 2015). In a nutshell, Greece will go to hell, and the rest of the continent will calmly go on.

Such an analysis is in fact extremely dangerous. The simple mention of this possibility by highly placed people could very quickly become self-fulfilling, with unforeseen consequences for everybody. As illustrated repeatedly since 2008, financial contagion can spread even faster than Ebola.

Indeed, more firewalls were created to isolate national financial markets between 2012 and 2015. From this angle, a Grexit could seem more containable. However, many things can go wrong. The collective banking guarantees remain quite small and complex. A Greek crisis could produce quick ripples elsewhere, for example, or through guarantees increase the budget deficit in France or Italy. In any case, a Grexit will instantaneously become a legal hell. There is absolutely no precedent. There could be no serious preparation. And it is totally delusional to imagine that Greece would get out of the euro without requiring a tonne of exemptions to cover the single market. There are innumerable connections between the two systems.

One must be a lunatic very far from the EU realities to believe that this would be easily manageable. What we shall be contemplating here is something like Brazil in 1982, Russia in 1997, or Argentina in 2003 – and with two aggravating circumstances. Firstly, these states didn’t need to exit from a common currency. Secondly, they had not been weakened by six years of austerity and a preliminary reduction of nearly 25% of GDP.

Finally, if there are (a few) more financial firewalls in 2015 than in 2012, the political firewalls on the other side are much weaker. Electoral instability is higher now, and so is the hostility towards the eurozone strategy, and even against the EU. There will also be elections in other peripheral states than Greece in 2015. Many people in the peripheral states have exhausted their savings, and/or their unemployment benefits. A lot of them have been unemployed (or underemployed) for many years. Furthermore, France and Italy now stand in a petrified situation, which has also led to more euroscepticism. It will not necessarily be in their long term interest to let others crucify Greece. With the passing of the years, the democratic legitimacy of this never-ending social purge becomes steadily more difficult to justify. Generally, the eurozone economic strategy appears much more evidently now to be a dead end. Finally, the UK is officially contemplating a Brexit, and Hungary has in fact already taken a lot of opt-outs. All this forms an extremely inflammable political context.

Finally, the economic situation in Finland, Austria, the Netherlands, and even Germany itself, is not so good now. Clearly, the Russian crisis and more generally the growth reduction in many emerging countries make the adoption of a real growth strategy in Europe more urgent. Unlike in 2012, growth hopes seem very weak. This hardly looks like the proper setting for a renewed financial crisis. Rather than threatening their neighbours with a new financial Armageddon, our wise men (and women) should become more positive about the new ECB dynamism, strengthen Juncker’s (rather weak) proposal for investment, and soften again the credit conditions in the EFSF in compensation for maintained structural reforms. Structural reforms remain however indispensable (from this point of view, the ousting of New Democracy and Pasok may even present some advantages). But structural reforms need absolutely to be supported by a global adequate macroeconomic mixt. A general compromise will be much less costly at the end for all parties involved.

The people in charge should forget the sequels, and go back to the classics. As in The Godfather, they must make the Greeks ‘an offer they cannot refuse’. And, as in Jaws, ‘use a bigger boat’. Until now, thanks to particularly repressive economic management, the eurozone has become the greatest debtors’ prison of the world. If nothing changes, sooner or later, some voters will inevitably stage a break out.


Charles Secondat


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