ECB's Mario Draghi Makes A Dreadful Mistake Over Greece And The Euro

APR 19, 2015 @ 1:32 PM 2,697 VIEWS

Forbes

By Tim Worstall

At least this is the way that I am reading this, when Mario Draghi said that the euro is irreversible, a one way street only. Therefore no one should be speculating about Greece leaving the single currency. The reason why that’s such a dreadful mistake to my mind is that it takes away the Great Big Bargaining Cluebat that the Eurogroup has over Greece.

I am of course starting from the point that at least some of the expressed desires of at least some of the participants in this Greek debt standoff are in fact true. Perhaps that’s not the way to start given that this is politics but that’s where I indeed am. And what we think we know is that the European Union itself would very much prefer to see the euro continue with Greece in it. So would the ECB and the Eurogroup. So also would the Greek citizenry. And Syriza has at least said that it prefers that too: although there are some members of that party who over the years have differed from that line. So, everyone’s getting what they say they want with Greece staying in. However, I still think this from Draghi is a horrible mistake:

"European Central Bank President Mario Draghi on Saturday rejected speculation that Greece may be forced to abandon the euro, reiterating that Europe’s single currency is irrevocable.

At a news conference during meetings here of the world’s top finance officials Mr. Draghi said he stood by a comment he made in August 2012 that the euro “cannot be reversed.”

Yes, I know that’s the standard line and so on. But think about the other side of this. Syriza insists that Greece deserves a new debt deal: they might well be right on that too. However, they also want that deal on their terms, not those the Eurogroup wants to impose upon them. Specifically, the Eurogroup wants to see substantial moves towards structural reform of the economy. And the specific ones that they want are anathema to a hard left party like Syriza. At which point that Great Big Cluebat is needed. For if Greece doesn’t agree to those structiral reforms then there won’t be a new debt deal. And that, almost inevitably, will lead to default. But default, in and of itself, isn’t all that large a problem. No one is saying that it would be fun or simple but, well, Greece has been in default on its foreign debts for some 50% of its existence as an independent country. It’s something that can be managed. And Greece is also around and about running a primary budget deficit so it could default and not have to impose monstrous austerity if it did so.

So the fear of default isn’t that Cluebat. However, the fear of being out of the euro if default does happen could well be it. But, look at what Draghi is saying: there’s no leaving the euro. Thus the threat of turfing Greece out of the euro (if anyone wanted to do it it would be by stopping EULA, the way in which the Greek banks are propped up) if it does default doesn’t exist. At which point, Greece gets something it might not mind all that much, default, without getting what it really doesn’t want, exit from the euro.

Which is why I think that Dragi’s made a mistake here. He’s cut himself off from one of his strongest negotiating positions. It’s tantamount to insisting that even if Greece defaults then it will remain in the euro. Which I rather do think increases the chances of such a default.