He who can destroy a thing, can control a thing
Dune, Frank Herbert
The dispute between Greece and its European lenders has not yet reached the point where the parties are frankly contemplating the results of their own intransigence.
Greece wants to remain within the euro but end its forced austerity. Germany demands that Athens fulfill the terms of the rescue agreements. Markets assume that the hardline rhetoric from each side is a negotiating tactic.
The question is who has more to lose?
If Greece leaves the euro economic chaos will result. But in a country that has seen its economy shrink by 25 percent, whose unemployment rate is over a quarter of the population, and whose people are looking at unending hardship that they feel has been imposed by Germany, chaos may be a relative term. Greek voters elected Alexis Tsipras to do exactly what he is doing.
Angela Merkel and Wolfgang Schauble know if they permit Greece to escape austerity the demand for relief will resound throughout the European Monetary Union. Why should Ireland, Spain, and Portugal not have received similar relief? What of Italy and France whose economies are stagnant and need harsh and unpopular economic reforms?
German leaders also understand, though not admitting in public-saying only that they are prepared for Greece to leave the euro-that once Greece departs the entire unification project threatens to go into reverse. The apparent inevitability of the union has been one of its greatest strengths. As Jacques Delors famously said, “Europe is like riding a bicycle. You stop pedaling and you fall off.” Remove the forward motion toward unification and national agendas will become dominant in Brussels.
Thus far German insistence on fiscal austerity has triumphed, not because of its moral and economic logic, but because the fear of euro dissolution has kept the individual interests of the 19 member union in check. But popular discontent with EMU debt policies is deep and widespread and it is finding a political voice.
For large numbers of people in Europe, the inescapable fact is that since the debt crisis exploded five years ago, the euro has made their lives worse and not better.
If Greece leaves the currency union those separatist tendencies will surge, regardless of the actual outcome of the Greek departure. The agendas of the National Front in France, the Five Star movement in Italy and Podemos in Spain will become more credible, powerful and a threat that Brussels dare not ignore.
Germany's interest in maintaining the EMU is more than just the allegiance of its elites and population to a political ideal, the goal of a united Europe. Germany is perhaps the prime European beneficiary of monetary union.
Half of German GDP is tied to exports and the majority of those products go to its European partners. The loans that have gone to Greece, Ireland, Portugal and Spain have kept those countries in the EMU, buying German products.
The euro has also been a boon to Germany’s export economy. The drag of the poorer EMU members has kept the euro weaker against the currencies of Germany’s non-EMU trading partners than would have been the value of the Deutsche Mark. Germany’s worldwide exports have benefited from the artificially low level of its currency.
If the EMU begins to sunder, the negative effect on Europe’s economy, which is already near recession and deflationary, would insure near and medium term disaster for Germanys’ exports industries. If Europe enters a prolonged economic downturn, which is possible in the wake of a Greek exit, Germany will be not escape the pain.
Even the beneficial effects of a weak currency could end. Once the euro is reconstituted as the coin of the fiscally prudent and economically successful nations of Northern Europe, it will necessarily rise in value and this time there will be no internal counter from the southern tier.
Despite the appearance that it holds the purse strings in the dispute with Athens, Germany has as much if not more to lose as Greece.
Germany is prosperous and orderly. The German economy and population have thrived under the euro more than any other in Europe. German history has made her the European nation most devoted to the idea and institutions of a continental union.
For Greece the euro has been a disaster. Greece will never be able to pay back its loans. Even servicing its debt is highly problematical without a reduction in the outstanding amount. The vast majority of the 240 billion euros lent to Athens has gone to pay its creditors and secure European banks; little has gone to help Greece improve its economy or the lives of its people.
Athens has long chafed under the regime of Brussels and ignored its dictates. Greek loyalty to the European project was already one of the lowest in Europe before the crisis; it is lower now. Greece is already far along the emotional road to disunion.
If Greece remains within the EMU so does the conflict over the union’s future. If Greece leaves it takes the dream of a European union with it. By electing Syriza the Greeks have faced the possible end of the EMU. The Germans have not. When confronted with that future they will flinch.
Chief Market Strategist
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