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High-stakes European poker: a reply to Curzon Price

Frances Coppola responds to ‘The Varoufakis game is not chicken’, authored by Tony Curzon Price. Greek exit now would be disastrous for both Greece and the Eurozone. 

Yanis Varoufakis, Finance Minister of Greece. Demotix/Wassilis Aswestopoulos. All rights reserved. Yanis Varoufakis, Finance Minister of Greece. Demotix/Wassilis Aswestopoulos. All rights reserved. In the current poker game between Greece and the EU, Tony Curzon Price thinks that Syriza holds a winning hand. His argument is that if the EU does not agree to Syriza’s demands, Greece can choose to leave the Euro, redenominate its debts into a new devalued currency, impose currency controls and regain control of its own economy. A Greek exit would force losses onto German banks, while Greece itself would recover as Iceland did.

In 2010, Greece could indeed have left the Euro as Curzon Price suggests. Redenomination into a new currency would have been regarded as default by the international community, so it would have been shut out of markets. Greece at the time had a sizeable primary deficit, so would have been forced either to impose sharp cuts to public spending or print money. Greece would have suffered a severe recession coupled with high inflation. It would have been very painful. But it might have been short-lived. And as Curzon Price points out, Greek default and exit in 2010 would have forced losses onto German and French banks. The consequences for the European banking system would have been severe.

But this is not the situation now. European banks have little exposure to Greek debt. The majority of it is held by Eurozone institutions, particularly the European Financial Stability Facility (EFSF). So it is not banks that would take losses if Greece were to leave the Eurozone, it is sovereigns. Not just the sovereigns whose banks lent to Greece in the first place, but all EU member states, including those such as Latvia that are considerably poorer than Greece. The ECB would also take losses on its holdings of Greek bonds. And the IMF, which like the EFSF is funded by its member states – including many that are much poorer than Greece – also would take losses. So a Greek default now would be ethically problematic.

Of course, the Syriza government may say that the poverty of other states is not its concern. But a Greek exit now would also have very severe consequences for Syriza. Greece is in far worse shape than it was in 2010. Its GDP has shrunk by a quarter: unemployment is at 27 percent and youth unemployment over 50 percent. Exit now would force an already deeply depressed economy into an even worse recession. It is hard to see that the Syriza government would survive such a decision, especially as it has no popular mandate to take Greece out of the Euro. And if it did not survive, then political chaos would be added to Greece’s woes, adding fuel to the flames of extremism. Greek exit now would be disastrous for Greece.

But a sudden Greek exit would be disastrous for the Eurozone too. And this is where the ‘game of chicken’ comes in. The Greek government believes that exit would fatally undermine the Euro as a single currency. This view has also – indirectly – been expressed by Mario Draghi. If one member state can leave the Euro, then others can. It is entirely possible that the Euro itself might unravel, as the Exchange Rate Mechanism (ERM) did in 1992 when the UK was forced out. The ECB prevented collapse of the Eurozone in 2012 by guaranteeing sovereign debt – but no sovereign had actually left the Eurozone. If the precedent of a sovereign leaving were set, it seems highly unlikely that the ECB could prevent speculative attacks like those that ended the ERM. Fear that the Euro would unravel has been the principal reason why the EU authorities have tried so hard to keep Greece in the Eurozone. Nothing has changed in that respect.

So whether Greek exit really is a card that Syriza can play depends on whether the ignominious end of the Euro project is a more frightening prospect for the EU authorities than losing office by triggering a Greek economic collapse is for Syriza. And as ever, when fear is involved, reality takes a back seat. Germany comforts itself that its banks are safe, so Greek exit poses no threat. This is to ignore the other channels, such as trade and politics, through which such a wound to the Eurozone ecosystem would spread economic and social instability. The EU institutions are under no such illusion, and for this reason have so far been more conciliatory to Syriza. But Syriza too is gambling for high stakes. If its bluff were called, what would it do?

I do think Syriza has a strong hand. But it is nowhere near as dominant as Curzon Price thinks.

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About the author

Frances Coppola is the author of the Coppola Comment finance and economics blog, which is a regular feature on the Financial Times’ Alphaville blog and has been cited in The Economist, the Wall Street Journal, The New York Times and The Guardian. Coppola is also Associate Editor at the online magazine Pieria and a frequent commentator on financial matters for the BBC.


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