Greece Preparing to Leave Euro

When the Chavista socialists in Syriza won the Greek election many forecasters raised the concern that Greece might leave the euro. However, most of them quickly subsided and joined the ranks of the non-confrontation opinion. The prevailing view over the past couple of months seems to have been that the Greek government will eventually cave in, stick to agreed austerity programs and honor its debt payments to the IMF.

I have refused to join the choir of consensus. On February 9 I explained (emphasis added):

There have been many attempts at predicting which way Greece is going to go under the new socialist government. Most of the voices heard thus far seem to agree that Prime Minister Tsipras will not seek a confrontational course against the EU. That is, however, a mistake. This is a man who considers now-defunct Venezuelan president Hugo Chavez a political hero. Tsipras is also a former communist (though being a former communist and at the same time a fan of now-defunct Hugo Chavez is a matter of political semantics) whose training in politics and – to the extent it exists – in economics is fully governed by those ideological roots. It is only logical that he continues to raise the volume vs. Brussels.

This ideological foundation for the Greek attitude toward the EU and the IMF has continued to elude international analysts. One reason is that most of those analysts have a business background or are otherwise trained in strictly quantitative methods such as econometrics; another reason is that most analysts are American, and Americans in general have a shallow – even non-existent – understanding of what role political ideologies play in European politics.

Related to this, it is important to keep in mind that Syriza is governing with coalition support from a small nationalist party whose feelings for the EU are perhaps even more unfriendly than those in Syriza.

Since my February 9 prediction I have steadfastly said that while the Greek future in the euro zone is more uncertain than most economic and political events, it is more likely that they leave the euro than that they stay in.

Today, The Telegraph reports:

Greece is drawing up drastic plans to nationalise the country’s banking system and introduce a parallel currency to pay bills unless the eurozone takes steps to defuse the simmering crisis and soften its demands. Sources close to the ruling Syriza party said the government is determined to keep public services running and pay pensions as funds run critically low. It may be forced to take the unprecedented step of missing a payment to the International Monetary Fund next week.

This is not the place to re-hash all the reasons why Greece is in this situation in the first place. Suffice it to mention one point, though, namely that ever since the end of the military government in 1974 democratically elected governments have emphasized welfare-state spending over a sound, working economy. Slowly but inevitably this has eaten away at the private sector. Eventually, the Greek economy collapsed into a deep recession, government tried to fix its enormous budget problems with austerity patches, the result was an even deeper recession – and here we are.

In other words, the origin of this fiscal crisis is in the welfare state. Now Greece has a government that by ideological conviction stands by, and wants to restore and even grow, that same welfare state. The only way they can do this – they believe – is if they leave the euro zone. While most Greeks have been against a currency secession, the Syriza government has now manipulated the circumstances to exactly where they need them to be, namely where they look like they care more about the Greek people while the evil global capitalist IMF does not.

Prime Minister Tsipras will be considered a national hero for as long as the drachma has some value vs. the euro. Which will probably be 3-6 months. Then the global market will have deemed the drachma worth little more than Monopoly money and Tsipras will have to resort to the kind of currency trickery they use in Venezuela (his vision of Greece’s future). Of course, with such reckless exchange-rate manipulation and money printing comes 40-50 percent inflation.

That is literally where Greece could be in two years, maybe less, if they leave the euro zone.

The Telegraph again:

Greece no longer has enough money to pay the IMF €458m on April 9 and also to cover payments for salaries and social security on April 14, unless the eurozone agrees to disburse the next tranche of its interim bail-out deal in time. “We are a Left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer,” said a senior official.

Again, the circumstances that fit the Syriza agenda for euro secession. And, as the Telegraph emphasizes, one has to look at this from a political, ideological perspective more than strict macroeconomics:

The view in Athens is that the EU creditor powers have yet to grasp that the political landscape has changed dramatically since the election of Syriza in January and that they will have to make real concessions if they wish to prevent a disastrous rupture of monetary union, an outcome they have ruled out repeatedly as unthinkable. “They want to put us through the ritual of humiliation and force us into sequestration. They are trying to put us in a position where we either have to default to our own people or sign up to a deal that is politically toxic for us. If that is their objective, they will have to do it without us,” [a Greek government] source said. … Syriza sources say are they fully aware that a tough line with creditors risks setting off an unstoppable chain-reaction. They insist that they are willing to contemplate the worst rather than abandon their electoral pledges to the Greek people.

Prior to the election of the French socialists to both the presidency and the parliamentary majority in 2012 there was not a single government within the euro zone that even grumbled about the tough austerity measures imposed by the EU-ECB-IMF troika. President Hollande wanted to part with some of the measures that the troika thought would bring France into compliance with the EU’s Stability and Growth Pact. (This is the EU’s constitutional budget balancing measure.)

France is still not in compliance with the Pact, and the alternative policies that the socialists imposed on the French people have not made any notable difference in terms of growth and job creation. But their balking at compliance with EU-imposed austerity measures sparked a movement of dissent through much of the European left. The idea of simply telling the troika that “we care more about our people than about you” eventually brought Syriza to power in Greece – and will now bring Greece out of the euro zone.

In fact, as the Telegraph explains, the Greek government has already drawn up the plans for it:

An emergency fall-back plan is already in the works. “We will shut down the banks and nationalise them, and then issue IOUs if we have to, and we all know what this means. What we will not do is become a protectorate of the EU,” said one source. It is well understood in Athens such action is tantamount to a return to the drachma, even though Syriza would rather reach an amicable accord within EMU.

The effects for the Greek economy would be devastating. For starters, their Treasury bonds, which are denominated in euros, would become even more toxic than they already are. The only way they could continue to honor their payments on those bonds is if they would peg the drachma to the euro. But that would hold up if and only if they locked the borders and prevented people from taking their money out of Greece.

Which is why they propose a nationalization of the banks. Thereby they can lock in people’s money and force them to keep it in the country. But such draconian measures would of course be tantamount to declaring war on the global financial markets. Not that a Chavista socialist government would care, but it would force them to take counter-measures to prevent a complete meltdown of the currency within the first few months.

One such measure is a double-currency system, which is in operation both in China and in Venezuela. That shields the “real” currency from massive depreciation, but it also creates liquidity problems in the economy. The Chinese government escaped those problems thanks to many years of massive trade surpluses that – by means of currency sterilization – flooded he economy with liquidity and cheap credit. (They are now paying the price for that exchange-rate policy.) The Venezuelan government has simply taken to the monetary printing presses to do away with their liquidity problems. One of the many effects is 40-50 percent inflation.

A Greek secession will have serious consequences for the euro zone. Keep a close eye on Spain this year, then France in 2016 and 2017. More than likely the euro zone will be dead by the end of 2018.