Schaeuble's Right, The Most Likely Cause Of Grexit Is A Mistake, Human Error

Forbes

By Tim Worstall

This is something that I’ve been saying for some time now, that if Greece really does leave the euro then the most likely cause of it doing so will be that someone has made a mistake. Now, I believe that Greece should leave (in common with many economists): but just about every European politician believes that it should not. And most Greek politicians believe that it should not leave, as is also the express wish of most Greek citizens. Given that it is the politicians actually running things here then there seems to be no good reason why Greece either should or will leave.

Yet that’s to misunderstand the fog through which all of this public policy is being discussed. And that leads to this:

Germany’s Finance Minister Wolfgang Schaeuble has made clear he considers a Grexit from the Eurozone possible, amid a harsh verbal clash with Greek politicians.

“As the responsibility, the possibility to decide what happens, lies only in [the hands of] Greece, and as we do not know what those responsible in Greece are doing, we cannot rule it out,” Schaeuble said on Thursday evening, while on a visit to Austria to meet counterpart Hans Joerg Schelling.

Which is, I think, correct. On the Greek side, Syriza (meaning Tsipras and Varoufakis but also their much harder left compadres in the movement) have a different world view from the main negotiators on the other side, the Germans at the Bundesbank. Yes, OK, it’s supposed to be all of Europe on the other side but it isn’t really.

What’s slightly odd about this is that the assembled Marxists, hard leftists and even outright Trots on the Greek side have a much more realistic view of what should happen. They are in fact echoing the standard advice that the IMF would give in these sorts of situations. If debt cannot be repaid then we need to reduce that debt to a number that can be repaid. Inflicting vast economic damage upon people and a society in order to try and repay debt that cannot be is just a waste of people’s livelihoods. Over on the Bundesbank side there’s more of a view that structural reforms are necessary (they are) and that insisting that the debt be repaid is the way to make sure they happen (not so: the greater the austerity the more difficult the necessary reforms are).

There is thus no real meeting of minds over what should be done:

Wolfgang Schäuble, Germany’s frank and outspoken finance minister, says the lack of progress is increasing the chances of an accidental Greek exit from the euro – a “Grexident”.

He also said the onus was on Greece to help itself.

Very much so. The biggest worry is that this basic misunderstanding will lead to someone doing something that makes Grexit inevitable. Say, just as an example, the ECB limits Greek bank access to financing, this sets off a real bank run (not just the slow motion one we’ve got) and then no one really believes that those restrictions must be loosened. On the grounds that only if the Greek feet are held to the fire will they really agree to make those reforms. But if a proper bank run starts then that’s that: Greece will be out of the euro as the only way they will be able to maintain having a banking system at all would be to refinance them internally. And as they’re not allowed to print euros this will have to be by printing New Drachmae. Do note that this is just an example, I can imagine a few more such scenarios.

A chaotic Grexit would be worse than the planned one that I actually advocate. But it’s also true that the most likely manner in which Grexit does or could happen is a chaotic one, not a planned one.

http://www.forbes.com/sites/timworstall/2015/03/13/schaeubles-right-the-most-likely-cause-of-grexit-is-a-mistake-human-error/2/