Throughout the interminable Greek-euro crisis, it has been almost axiomatic that keeping Greece inside the euro, and thus preserving the integrity of the single currency, is a core aim. Yet in the game of chicken between Syriza-led Greece and the more hawkish creditors in the eurozone, it has become increasingly clear that the latter are ready to ditch the Greeks if necessary.
If that were to happen would it matter, who would it affect and how?
For the Greeks themselves, the simple answer is that it would almost certainly be a calamity. A banking system already under considerable stress would face collapse as what has — so far — been described as a bank walk (rather than bank run) turned into a bank sprint; rapid devaluation of a successor currency would lead to high inflation; and extended exclusion from the sovereign bond market would be unavoidable. A forced, chaotic departure would be politically destabilizing and it is hard to see where the Greek population would turn next to govern it.
Many arguments have been put forward to justify continuing efforts to keep Greece on board the good ship “euro,” but dispassionate analysis suggests that few of them are really convincing.
A first is that an admission that euro membership is no longer irrevocable would encourage financial markets to seek out the next most vulnerable victim for speculative attack. If this led to renewed upward pressure on the borrowing costs of the more vulnerable members of the eurozone, there could be wider problems. But the reality is that the EU leadership has constructed defensive walls and the consensus is that they will be robust enough to withstand such attacks.
The logic of Mario Draghi’s famous statement from 2012 that the European Central Bank stands ready to do whatever it takes to safeguard the euro is that there is enough firepower to repel an attack from the markets. There might be a brief worry about contagion, but it will not last. Moreover, the hard fact is that a euro no longer burdened with Greece will be more, not less resilient.
Second, Greece is not only a relatively small part of the eurozone economy — amounting to barely 2% of the aggregate GDP — but is also a surprisingly closed economy with quite a low propensity to import. Small economies typically have a high trade-to-GDP ratio, but that is not true of Greece which is at the bottom end of the scale among EU countries.
Some consumer goods manufacturers in major exporting economies like Germany might lose some sales if Greece implodes, but they can easily make them up by selling to other parts of the world. Greece in short is a long way from being “too big to fail.” On the contrary, it is too small to matter. When Detroit went bust recently did anyone seriously think it would inflict much harm on the U.S. economy?
Even if the economics are dismissive, what about the politics? Certainly there are geo-political concerns, not least the fear that a Greece spurned will turn to mother Russia. There can be little doubt that Vladimir Putin is a master of divide-and-rule foreign policy and he may have calculated that a Greek veto on renewed sanctions against Russia over Ukraine could be a reward worthy of extending a loan to Greece.
Yet here again, the arithmetic is hardly alarming. Russia is a vast country, but a weak economy that has been diminished further by lower oil prices. It was not willing to offer financial support to little Cyprus even though Russian interests — and money — were at stake, and it is hard to see how a country itself in recession could afford loans on the scale that Greece manifestly needs.
No one wants to see political instability in Greece and there might be fears that if it occurred it would infect other countries. Anti-establishment parties have made their mark in several EU countries, some of them inspired by Syriza’s example. But the sheer ineptitude of Syriza during its few months in government has hardly been encouraging to others.
What remains is a moral issue. Europeans do retain a sense of solidarity with one another that is prone to be under-estimated by those in other parts of the world, and many in Europe would be dismayed if Greece were cut loose and suffered. Solidarity, though, has its limits and the shenanigans of recent months have brought us closer to those limits.
Syriza’s leaders either thought they had a stronger hand than was really the case, or that bluff would work. They are now realizing that the opposite is true and that is why a deal at last looks likely.