David Herdson on Saturday
The current and next phases of the Eurocrisis is all about who will prevail when the irresistible force of the Greek electorate meets the immovable object of Angela Merkal and the Greek debt-holders.
Without funds from the international institutions, Greece will default. Those funds will not be forthcoming if Greece doesnâ€™t implement the policies that were part of the deal. Those policies wonâ€™t be enacted unless Greece has a government committed to them. Five of the six polls taken since the May election point to a two-to-one anti-austerity majority after the next election. It ought to be a no-brainer. Is it though?
For one thing, the election re determined yet. Since the May poll, thereâ€™s been a consolidation of votes from the minor parties towards New Democracy on the pro-bailout centre-right and Syriza on the anti-austerity left. With a month or so still to go, the margins are very tight though one thing that does look likely is that either a ND-Pasok coalition or a Syriza-led alternative will be viable next time.
Even if Syriza do come out on top, thereâ€™s still an almighty game of bluff and chicken to be played. Both sides must know how bad an uncontrolled default would be. On the one hand, Greeceâ€™s government would not be able to pay wages, pensions and other expenses anywhere near in full or on time. On the other, thereâ€™d be severe strains on the banking system as the creditors assessed their losses, and thereâ€™d be fear of a domino effect in the larger Mediterranean economies.
It would be better if a deal could be done – except of course as Merkal, the IMF and ECB would point out, a deal has already been done. If Greeceâ€™s word wasnâ€™t reliable then, why would it be now?
The risk then is that both sides believe that the other is bluffing and will cave in at the last minute, neither then does, leading to the uncontrolled default.
What then? The belief does seem to have taken hold that default must automatically lead to an exit from the Euro for Greece. That may well be a self-fulfilling policy – if everyone has prepared that response to that outcome then thatâ€™s what will happen, irrespective of other options. It may even hasten default as Greeks undermine their banking system, withdrawing precious Euros while they can. It neednâ€™t though. Thereâ€™s nothing in the EU treaties to enforce such a move (indeed, thereâ€™s nothing to enable it at all, though practicalities trump legalities at times like this).
Historically, thereâ€™ve been several cases of states within a currency union defaulting or repudiating debt and continuing within the currency union, most obviously within the United States. Following another banking crisis – this time in 1837 – nine states or territories failed to honour their commitments. They still use the Dollar, though Mississippi is still blackballed on some markets as their repudiation remains unresolved.
What the impact of a Greek default and/or exit would be on British politics is harder to assess. On the one hand, the economy would take a hit, with growth likely remaining at best flat for the rest of the year and unemployment trending back up again – none of which would be good for the government. On the other, it would be a clear example of the failure of over-borrowing and over-spending, which doesnâ€™t much help Labour. It might equally be interesting for the media to ask Ed Miliband and Nick Clegg whether they still favour Britainâ€™s entry into the Euro in principle.
As for the betting angle, Paddy Power have it as 4/6 that Greece will still be using the Euro at the end of the year, against 11/10 that it will be the Drachma. Oddschecker say that Stan James apparently have Greece as 1/7 to be the first country out of the Euro, though it wasnâ€™t on the website at the time of writing (the 14% return being about half that of Greek 10-year bonds for comparison). Neither seems to offer much value at the moment but itâ€™s worth keeping a keen eye on the Greek polls as a lot will turn on the election outcome.