After the crisis is before the crisis

Published in Business Spectator (Melbourne) 4 June 2015

Apparently it is crunch time for Greece — again. Over the next few days, we will find out whether Greece will stay in the eurozone, whether it will receive more bailout money or whether it will finally default (again).

Under normal circumstances, all of this would be exciting stuff, except, it’s hard to get excited about something that has been dragging on for more than five years.

Greece’s fundamental situation is not much different from when the euro crisis started in late 2009. If Greece is the can the EU keeps kicking down the road, this can has been dented so much it probably looks like a proper football by now.

The reasons why Greece is still part of the euro club and why it has not reintroduced its own national currency yet are all political. None of them have anything remotely to do with economics. This makes it harder to predict the next steps in the ongoing crisis.

Let us be clear: There never, ever was a compelling economic rationale why Greece should belong to the eurozone. The Greek economy was not a good match for the more developed and more productive economies of central and northern Europe. The reason why Greece was admitted to join the club was because it fitted the narrative of the European project. It was just a good look to have the ‘cradle of European democracy’ as a founding member of Europe’s monetary union.

But, just as there has never been a good economic reason for Greece to join the eurozone, now there is no good reason why the country should not leave it.

Five years of prolonging Greek misery have failed to get the country back on track. The only achievement (if one can call it that) was to shift the risk of an eventual Greek default from private to public investors. If Greece really goes under now, it will be the central banks and taxpayers taking a hit, not the banks and insurance companies that invested in Greek bonds.

Greece itself, however, is just looking as desperate as it did at the beginning of the crisis. Its economic growth is anaemic, its unemployment scandalous and its reform agenda has stalled. Greece has not been able to claw back economic competitiveness, nor has it proved to be a reliable partner in the European context.

So why is it still part of the eurozone? And why may it even remain one after next week?

The first reason why other European nations have shown so much patience with Greece is their fear that a Greek default would create a geopolitical problem for the EU and NATO. Greece is a heavily armed country on the fringe of Europe. Keeping it within the Western sphere of influence might be preferable to seeing it seek help from Moscow or Beijing. In Berlin, Paris or Brussels, leaders might weigh up an extra few billion euros of support for Athens against the prospect of strategic destabilisation of a small but geographically important nation.

Keeping Greece financially afloat therefore has less to do with economic considerations. It is all about making sure that there are no security risks at the EU’s south-eastern borders.

The second motivation for keeping the eurozone alive at all costs is to prevent future speculation against the euro. The moment Greece is allowed to depart, it would change the nature of the monetary union. A monetary ‘union’ is only a true union if it cannot be broken up. If you can break it up, it is not a union but a fixed exchange rate mechanism.

Though the differences may sound semantic, they are fundamental. It would be futile for anyone to speculate against, say, California being forced out of the US dollar (no matter California’s fiscal position) because there is not the slightest chance that California would ever introduce its own currency.

Ideally, it would be like this with the eurozone. The moment the eurozone allows a member to depart, this logic no longer applies. Once there is an exit path opened from a monetary union, it sends an open invitation to markets to speculate on who is going to be next.

The eurozone obviously cannot have an interest in such speculation arising — irrespective of how much Greece would benefit from leaving. A Greek exit would make it possible for investors to place bets against other members. It would be similar to George Soros’ famous bet against Sterling staying part of the ERM, which culminated in Britain’s exit from the system on Black Wednesday 1992.

The third and final reason for Greece staying part of the eurozone is that it would be the first time in the EU’s history that a step towards European integration would be reversed. That is not supposed to happen according to the EU’s ‘ever closer union’ mantra.

So, we see three reasons why Greece should stay part of the eurozone which have nothing to do with Greece’s actual performance under the euro. Even though the euro is hurting Greece, for geopolitical, strategic and political reasons the country is expected to keep the common currency.

In looking at current attempts to save Greece for the umpteenth time, we should keep this background in mind. This is not about finding an economic way out of Greece’s problems. It is not about finding a balance between bailout and reforms — or at least not primarily.

It is once again about finding a political response to an economic problem. This is what makes it so hard to come to a proper solution. And this is why for five years Europe has not been able to solve the Greek crisis.

Crunch time or not, the Greek crisis will remain with us for much longer. There is no way it will be resolved once and for all this week. It has been promised to us too often over the past five years. In Europe, ‘after the crisis’ means ‘before the next crisis’.