The odds of Greece leaving the euro have never been higher

By Matt O'Brien December 29, 2014

The Washington Post

Beware Greeks bearing the same political crisis over and over again. Because eventually this will be how the euro crisis ends: not with a bailout, but a ballot.

It's a tale as old as Homer, or at least it seems that way. The Greek government, you see, has once again collapsed under the weight of the country's austerity program, and anti-bailout parties are leading the polls ahead of new elections. This time, not that it really matters, the ruling coalition led by the right-of-center party New Democracy fell apart after it couldn't get its presidential nominee, a largely ceremonial role, confirmed in three tries. What does matter, though, is whether New Democracy, which is still running a close second, can hold on to power in the snap elections scheduled for Jan. 25. If it can't, then the far-left party Syriza will get its chance to lead Greece in a high-stakes game of chicken with Germany.

Syriza's platform is as simple as it is sensible. They want more spending and less debt. Specifically, they want to spend €1.3 billion, or $1.6 billion, more on food stamps, health care, and restoring electricity to households that can no longer afford it all to alleviate the worst of the country's suffering. And they also want to renegotiate how much of its debt, which even after getting written down before is still over 175 percent of gross domestic product, Greece will pay back. Bankers, of course, think this is "worse than communism," because Syriza is admittedly a little too sanguine about how much money it could raise by—stop me if you've heard this before—cracking down on tax evasion. But, as Wolfgang Münchau points out, there's nothing radical about what Syriza is asking for even if the party itself is. It's pointless to try to make somebody pay back money that they can't pay back. It will fail, and, until you admit that, push them even deeper into poverty. Or, in Greece's case, into the worst depression in history.

Germany, though, will never let Greece have less debt and less austerity. It's the If-You-Give-Greece-A-Cookie principle of the euro crisis. Anti-austerity parties like Podemos in Spain, which in just a year of existence has become the country's most popular, and the Five Star Movement in Italy would demand any and all concessions that Syriza got. So Germany is holding to the same tough line as before. Greece has to keep doing austerity and reforming a labor market that's the reason the word "sclerotic" exists, or, it's implied, Germany will kick it out of the eurozone. And if that's not enough to scare people out of voting for Syriza, the ECB will not-so-gently remind them, as it did to Ireland, that it will then withdraw the central bank funding they need to keep their banks afloat.

What's the German word for hardball?

Now, I could have written the exact same paragraph two years ago, the last time Greece had elections. But as much as it might seem like nothing has changed since then, one big thing has: Germany and Greece both think that they have stronger hands now than they did before. And that means there's a greater chance that both of them will try to call each other's bluff, only to find out that the other actually wasn't bluffing—which would force Greece out of the euro.

Germany, you see, couldn't afford to let Greece leave the euro in 2012, as much as it would have liked to, because panic over Greek bonds was spreading to Spanish and Italian ones. It was the domino theory. If Greece could exit the eurozone, markets thought, then the other crisis countries could too, in which case, you wouldn't want to be left holding their debt that might get redenominated from euros into less valuable pesetas or lire. Even worse, this panic was self-justifying. The more markets pushed up Spain's borrowing costs, the more it looked like Spain would be forced out of the euro—which only pushed up their borrowing costs even more. This went on until the ECB decided to stop it. Specifically, it used the three magic words of central banking—"whatever it takes"—and promised to buy a country's bonds in unlimited amounts, if necessary, to keep their borrowing costs down. Since then, of course, borrowing costs have fallen to all-time lows. And, as Neil Irwin points out, not even this latest Greek blowup has been enough to send Spanish or Italian bond yields up. That might make Germany think they can toss Greece out now without it being the end of the world, let alone the end of the euro.

Greece, though, couldn't afford to leave the euro in 2012 either. It had what economists call a primary deficit: even if ignored all the money it owed in interest, it was still spending more than it was taking in as taxes. That's why defaulting on its debts and exiting the euro wouldn't have meant the end of austerity. It would have meant even worse austerity. Think about it like this. Even if it didn't have any debt to pay off, Greece would have still had a deficit. But nobody would lend money to Greece if it defaulted, and nobody would bail it out if it left the euro. So it would have had to balance its budget immediately, or print what it needed and watch inflation soar. Greece, in other words, wasn't threatening to cut off its nose to spite its face if Germany didn't give it more money. It was threatening to shoot itself in the head to spite its face—not very credible. Today, though, Greece is projected to have a primary surplus of 3 percent of GDP, which makes ditching the euro something approximating plausible. Greece would still have to bail out its banks, probably by printing money, and its economy would still go into another tailspin, forcing it to print even more money, but it'd be a manageable disaster. Especially when it already has 25 percent unemployment.

So, more than ever before, Germany feels like it can let Greece leave, and Greece feels like it can leave. Neither of them want that, but neither of them don't want it so much that they'll do anything to avoid it. That's why there's never been a greater chance of Greece dumping the common currency as there is right now. It's a gamble that Germany shouldn't want to take, not when there are so many anti-austerity parties popping up all over Europe. Markets, after all, have a way of only taking things in stride until they actually have to take a step—and then proceeding to melt down. Just because there's no contagion today doesn't mean there won't be tomorrow.

But whether it happens in Greece or Spain or Italy, this is the endgame for Europe. The euro crisis is a financial crisis that morphed into an economic crisis, before ending as a political one. Now, it's true that the common currency still has a lot of moral authority in Europe's postwar world, but you can't eat moral authority. And, at some point, voters will get tired of a paper monument to peace and prosperity that make the latter impossible.

Even a really cool wooden horse couldn't make people forget that.