The anticipated Der Spiegel article on Greece leaving the eurozone

It’s now up.  Maybe it’s “old news” by now, but the chances of the eurozone holding together have never looked smaller, even since two or three days ago.  It’s clear, if anyone had doubts in the first place (I didn’t), that no eurobond and no major package of truly committal aid will be forthcoming.  The next question is, when Greece goes, how strong a pledge do the remaining nations receive for EU/German aid?  “Not so strong” is my current prediction, in which case we will work our way through a few dominoes, for better or worse.  In that case, I wonder if Spain and Portugal would do better to leave with Greece or shortly thereafter.  I don’t imagine that the treatment of “the Greek precedent” will make anyone have a warm and fuzzy feeling about the process of transition.

Don’t forget to note the remarks about Ireland on p.2.


Germany and the strong EU countries' best shot is to "own it" and pre-emptively expel the Greeks from the Eurozone.
1. Strong punishment will be easier to sell at home, and give cover politicians protecting their own banks (It's no longer a bailout of our stupid banks, but a defensive measure to protect our banks from those stupid Greeks!).
2. It sends a signal to the other laggard EU countries to get serious with their own austerity programs of face real consequences.
3. The strong EU countries will miss being bound to Greece much less than Greece will miss the strong EU countries. The other questionable countries should make their own calculations accordingly.

A country or a group of countries cannot expel another member from the currency union.

Yes, because all the rules have been adhered to up to this point!

In other words, you are saying the strong EU economies force Greece to totally default on the debts held by the German, French, US banks and funds because the option that just yanks the teeth and costs five times as much is better.

No, I am saying that as a method of supporting German banks, giving money to Greeks to give back to German banks is both unpopular an inefficient. More efficient because the Greeks don't get to siphon off part of the funds and more popular because nationalist political cover is going to go further than "helping the Greeks" political cover.

The extent to which Greece fails to repay its debts remains to be seen under either circumstance, but they still have incentives and some ability to repay even if they're expelled. They appear to have little incentive or ability to repay under the current scheme.

There is little doubt it would be better for other endagered (everybody but Germany?) countries to live before they are forced to do so. The only problem with that rationale is that those countries didn't get where they are by doing what is better for themselves.

The first one out is going to make some nasty mistakes. It might be good to see how the Drachmatization of of the Greek economy goes and see if any lessons can be learned first. Plus, there is the whole Lehman fiasco. Greece's exit may be sufficiently bad that they find a way to save the rest.

There is some hysterical reaction from FreeExchange @ It seems to incite, or maybe just invite, sarcasm towards Der Spiegel with comments such as these:


I can hardly believe that an economist at the Economist, a paper I have read since I was a teenager, seems almost ready to blame Germany for Greece’s problems. I find this to be the more disturbing development.

Any advice for those in troubled countries who hold large Euro bank balances?

Transfer it into dollars, or kroner, or what?

Move it into a German bank. The currency movements have already made it expensive to exit the Euro, but you can move it into a German bank at low cost. You might want to pick one with low leverage if you can find it. You might also want to take a few weeks of cash out of the ATM in case they freeze accounts and it takes some time to shake it all out.

I would think Greece will go down in a matter of days. CDS's are apparently pricing in a 98% probability of default. What does Greece gain by staying? The sooner it defaults, the sooner it can start rebuilding its economy.

Tyler, a poor Spiegel's article, and a terrible post. The article fails (1) to provide a clear description of competitive positions within the German government and the support they appear to have, and (2) to give some measures of how serious the Greek problem is today and how it has been evolving and it is expected to evolve. Journalists should have read at least about the relevant official documents about the commitments the Greek government signed and about their implementation. Indeed, anyone attempting to understand what is going on must read those documents.

Your post's title is wrong and very misleading about the article. The article is about the internal debate in the German government about how to handle a Greek default and its consequences --it's not about the Greek government abandoning the Eurozone. You refer to the article as an excuse to give your opinion on the possibility of a breakup in the Eurozone --triggered by Greece's departure but involving also Spain and Italy. You give only one argument for the breakup: other countries will realize that Germany will not help them. Indeed, it is possible, but how probable? You may believe that its probability is increasing because of a more open debate about the crisis and alternative policies. Your belief assumes that fraudulent clowns are idiots, and you can bet that they may be many things but not idiots (at least in Public Choice we don't assume that they are idiots). Although Rodriguez Zapatero is a lame duck --he will be leaving the Spanish government on November 20-- and is responsible for his country's crisis, he never would take Spain out of the Eurozone. And you can bet that the two main candidates are running their campaigns on the promise of Spain being forever in the Eurozone. And Berlusconi will promise not to have sex again before leaving the Eurozone.

Take advantage of your visit to Toulouse and talk to Jean Tirole and his colleagues about what is going on. I suggest that before departing for France you read the official documents about Greece as well as some Spanish newspapers.

, oh well, we know that those happy days are gone when economists behave more and more like evangelists.

Tyler, you may want to take a look at this new column on French banks:

I've been reading European newspapers too, and E is closer to reality on this. Merkel, at the end of the day, will have to contribute, but in exchange, Germany will have a bigger voice in EU governance and finance. You can see this in even the SPD debates.

Or, to put it another way, they have more to lose (loss of exports, high DM, and failed banks) relative to what they have to gain (more control, internal EU exports, bank stability) from not doing a workout.

You can always expect people, reluctantly, to do what is in their best interest but Germany has to put on the squeeze first and appear irrational to get there. Just hope they know when to work a deal and don't misjudge events.

I enjoyed this quote: "They have even found a solution for a problem that had Schäuble's officials worried at the time. Contrary to earlier assumptions, restrictions on the movement of capital, which could be used to prevent Greek citizens from moving their money abroad (something that would endanger the country's banks), are now seen as being compatible with EU law. "

My translator: "Stupid pesky citizens, how can we drop a cage on them? We'll never pass a new EU law of this tenor, so lets just announce it is now seen as being compatible with EU law."

Borrowers and debtors need to bear responsibility for their own actions. Refusing to help Greece will give the market much more long run confidence than subsidising incompetence.

Well, the problem is some Wall Street bankers came up with a way back in the glory days to made Greek debt look perfectly safe using the same financial engineering that made pools of NINJA mortgages perfectly safe and German bankers bought the Greek debt with the deposits of Germans.

That makes German depositors in German banks the ones responsible for the bad Greek debt, because after all, the US banker financial engineering that made the debt risk free was not at fault.

But the German bank depositors are looking to the German government to make sure they aren't held responsible for making loans to Greece. Just like you didn't want to pay for the bad mortgages Countrywide made and sold to Goldman which then sold them as AAA to your money market account or your deposit bank putting you on the hook for those bad mortgages.

Right on. Let the banks recapitalize as a condition of assistance. Haircut time.

"financial engineering" - this phrase should have been sufficient warning that we were heading for trouble.

why exactly does a Greek default require Greece leaving the Euro? It would be easier for the Greek government to continue its spendthrift ways if it did, but all the commentary I see seems to assume that a Greek default would *require* leaving the Euro as a logical necessity. Even if California were to default, it wouldn't need to leave the Dollar, would it?

It doesn't. Read the article.

"Portugal would like to take the same approach, but the country lacks enough products that are competitive on the international market. This is forcing the center-right government of Prime Minister Pedro Passos Coelho to employ tougher methods.

It is cutting back healthcare services and salaries for government employees. Hardly any government expenditure has remained untouched. At the same time, Coelho is raising taxes on high-income groups, electricity and natural gas, and even Christmas bonuses."

Many of this is wrong - for example, the new government did not made any cuts in salaries of government employees (unlike the former government), and in many occasion make a pledge of not reducing salaries.

I never thought I'd see the day when Greeks and Germans decide they have different outcomes in mind. It's almost like, they're different or something. And, like, transnational unions are based on false premises, or something. I think I'll just read the New York Times until all these bizarre thoughts go away.

Obviously, E. Barandiaran and Anthony are correct. There can be no absolute insurance. The sooner the partial default, the better. Hey, we just found a new way of saving a fixed-exchange rate regime!

If Germany insists on austerity measures that are both drastic and rapid, then maybe Greece is better off defaulting and striking out on its own to solve its problems alone. Germany is as complicit in the mess in the Eurozone as Greece, but there seems to be little honesty about that point. Of course, maybe things will turn around still.

Time to book a vacation in Greece. Greece is the place for food, fun and frolic, and now it will be cheap again. Germany specializes in Angst, Ärger and Arbeit, and now it can again concentrate on those.

I was expecting air-fares to Greece to respond. Can't see any trends yet.

I'm on the train of thought that Germany leaving the Euro and returning to the Mark would be the best possible course.

The idea is that if Greece leaves than it will be economically and politically isolated, it's currency will massively depreciate, but more importantly it's external debt which would in this case be denominated in Euros will skyrocket. This means default and Greek banks shutting doors. Many, many, many, many times worse than 2008 in the US.

However if a more healthy country like Germany exits, than the Euro will depreciate of course, while the Mark will appreciate, this will help correct some of the imbalances that have been all-pervasive in Europe once Germany had become more competitive. Of course most importantly this means that Greece (and well by extension Italy, Spain, Iceland, Ireland) see their debts denominated in a depreciating currency. This will also help toward making them more competitive.

If there is any chance at all that Greece will exit the Euro and everyone's bank deposits will be converted into some new, much less valuable currency, doesn't this pretty much guarantee bank runs? Who will want to get stuck with a new currency whose only purpose is to be able to be inflated to get out of the current crisis? If this currency transition happens, what guarantee is there that a Greek's Euro deposits in Germany wouldn't be redefined as New Drachmas or something as part of the transition?

Previous posts on this site have suggested that this is, indeed happening.

Which is why it's slightly more probable that Germany will leave the euro instead.

Greece leaving the euro (& the conversion of domestic bank deposits into the new devalued currency) would almost guarantee bank runs in Portugal, Spain etc as depositors in those countries rush to get their euros transferred to a German bank before it happened to them.

A German exit (they might have to take the Benelux countries with them) would devalue everyone else at the same time, and might thus be a little more orderly...

...though far from dull.

I personally would not rely on "Der Spiegel". Rather on "Die Zeit"...

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