Why I think Greece will leave the eurozone this year or soon thereafter

Matt Yglesias has a good argument to the contrary:

On its face, the political crisis in Greece seems relatively likely to lead to Greece exiting the Eurozone. And why not? Europe’s leading politicians pretty clearly regret having let Greece in back in 1999 (particularly in off-the-record conversations), and Greek voters are clearly fed up with being told what to do by Brussels and Frankfurt. Journalistically, a “Grexit” is certainly the most interesting outcome, so people talk a lot about it, and at this point there are a lot of plausible theories about how it could go. But I think it’s not going to happen. The forces of the status quo will rally, and another grand coalition will lead Greece through several more dreary years of austerity and slow growth.

Nonetheless I think Germany wants them out.  First, I think Germany regards Greece as a kind of cultural and economic cancer for the eurozone, and they don’t want to enshrine the principle that eighty percent default is OK.  Second, Germany sees a fair amount of eurozone stability right now (NB: I’m not saying stability is always good in every way) and has noticed that the contagion effects from the recent Greek troubles have been small.  This is not a bad time to get them out.  Third, Germany is smart and knows that the real problems are Podemos in Spain and just about everyone in Italy and maybe even a few people (or more) in France.  Now is a good time to send splinter parties a message that they had better not mess around with the Troika, and what could do that better than an economic disaster in a recalcitrant Greece?

So I think Germany will play brinksmanship with Syriza and, when the time comes, simply pull the plug and leave them high and dry.

Addendum: Here are some useful graphs.


Why not back up your prediction with a bet. Make Yglesias an offer he cannot refuse ...

Bets seem to be popular...over at TheMoneyIllusion, the famous Scott Sumner is betting me $1k that he can prove he thought about Targeting NGDP framework before 1996, contrary to my speculation that he didn't. I will not take him up on that bet, since he has inside knowledge that I don't have, unless I agree to pay up in...worthless old drachma!

As for Greece out of the EU, that would be Syriza's dream come true, so if Germany calls its bluff, I think Syriza will jump at the chance to exit. Devaluation of the drachma was a time tested way to make ends meet back in the pre-Euro days. I personally don't think it will affect me much (then again, I and others have already moved their money out of Greece). Greece is the modern leader in defaults, having defaulted more in the last 200 years than any other country, including Argentina and Russia.

I wonder why the hell anyone ever lends Greece anything. If it were a man, it would be homeless.

Could it be their last default ever, after which no creditor takes the risk again?

Could it be their last default ever, after which no creditor takes the risk again?
- See more at: http://marginalrevolution.com/marginalrevolution/2015/01/why-i-think-greece-will-leave-the-eurozone-this-year-or-soon-thereafter.html?replytocom=158420301#respond

It's not like lending $20 to somebody who's stiffed you repeatedly though. It's more like buying an unreliable car - it'll be fine for the first couple of years and if you sell it at the right time everyone (except for the sucker who bought the car from your) can drive (or walk) away happy.

Yeah! Move your money to Argentina sharpish.

It's more like they lend $20, creditors with the help of corrupted Greek politicians helped get the dept for that original $20 up to $200000, and now Greece is being sold by the pound. Resources, land, everything. It's a big big story to be told here, with more tentacles than mighty Cthulhu...

"As for Greece out of the EU, that would be Syriza’s dream come true", well i understand how someone reading the headlines could reach to that conclusion but as we all know things are seldom what they seem. I am a Greek and i am not at all convinced that Syriza is dreaming of Grexit, maybe a small part of it is but it's not capable of forcing their way. On the other hand, it could happen due to incompetence and / or tactical stratigical errors, but i would advise anyone who is willing to take the bet for Grexit to keep in mind that Syriza does not want it to happen.

We should distinguish between Greece leaving the EU and Greece leaving the eurozone. Leaving the eurozone means start using another currency (what ever you call it) but still being a member state of the EU. Leaving the EU means stop being a member state of the EU and you use another currency.

The latter means that you cannot travel freely inside the EU, either for vacations or to find a job. Depending on the agreements between the countries you'll need a visa, like when you go to the US. A different visa for vacations, different for doing business, different for employment. This scenario in my opinion is the worst one and I think here in Greece only the communist party (KKE) wants it.

The first scenario, that of leaving the eurozone, I think is preferable to most EU member states and also the left wing of SYRIZA

Do most here think that having many sovereign countries with competing economies share a currency is hard to manage in the long run? By not allowing currencies to float, countries don't get to easily leverage and build on the strengths of their economies. Things are sort of held in place, and weaker economies can't can't use exchange rates to benefit from things like cheaper labor, tourism, and outside investment. Stronger economies may not want to get rid of the shared currency because it will make their exports more expensive. Curius what the consensus is here.

That's exactly it, Solsi.

All those different countries strapped to one currency is asking for trouble.

If Greece still had their own currency, they would have been out of this mess (or maybe in a less deep mess) five years ago.

Would it?

What does Greece export that would have generate vast amounts of wealth if it could be devalued by an adjustment in the value of the currency? How much investment exists only because of the stabilizing and value maintaining characteristic of the euro?

There are two insurmountable problems that Greece faces; an unsupportable level of debt, and a government structure that costs more than the economy can support. How would a floating currency fix that?

It 'exports' Tourism.

Aren't shipping and tourism the main tradeable parts of the economy? Maybe add in receiving bailouts as the third leg. There's also some agricultural exports (cotton, olive products and fish)

If Greece keeps sinking into the mire, won't they have to raise funds by selling off core assets? We're already seeing more foreign purchases of Greek real estate. http://www.wsj.com/articles/investors-returning-to-greeces-real-estate-market-1409673877

If the hotels end up in foreign hands, won't the tourist money just flow right back out again?

There's a real chance chance that Greece ends up with too few domestic assets left with which to generate exports. What happens then?

It is madness to think that all the Euro currency countries can have a common coinage but each with varying pressures and different tax levels with each country competing with the others for advantages to its own countries product output. The only possible way it can work is absolutely common tax laws and wages along with the common currency. Its about like making men and women equal. In law somtimes/maybe they are but in truth they are different and always will be.

Well, it works in the states, wages, tax, property value, living cost etc are quite on a different ballpark between lets say, Los Angeles California and Mayfield Kentucky, yet it still works...

Isn't it so that leaving EZ is possible only together with leaving EU? If so, I think it's techically easier for Greece to simply default on the bonds than for the whole EU countries to amend the existing treaties in order to allow the countries to leave EZ whenever they like.

This analysis does not consider Germany's non-financial motives. The Euro is Germany's baby, the crown jewel of its central role in a peaceful, post-war, integrated Europe. More specifically, it's Helmut Kohl's baby, and Angela Merkel is Helmut Kohl's protegee. Yeah, everyone wishes Greece hadn't been admitted in the first round; but that's not the same as being willing to sacrifice is principle of Euro irreversibility in order to correct that mistake.

I'm willing to make a $1K bet with Tyler at even odds that Greece will still be in the Euro on 31 December 2015.

Heh. I had the same impulse, but due to Tyler's Krugmanesque equivocation, I'm prepared to draw the line on an even money bet (up to $1K) at 30 June 2016.

The graphs in the link were scary though.

Frankly, it is pure gamble, not much better than forex adventures.

Whatever the result on 12/31/2015 is, there will be plenty of sophisticated reasoning for it, trumped around by the lucky gamblers - and the same plenty of sophisticated reasoning against it will silently rest in the dustbin of history.

Add the residual cultural guilt over the wars and I think you have the reason why Germany won't play such machiavellian games with their foreign policy. Greece may exit, I have no idea, but the mechanism won't be the Germans driving them out.

I'd be more interested in seeing what the ratio would be of (yes vs no's) on Greece leaving the EZ in a three year time frame. InTrade is Sport bets only now isn't it?

How about, if the germans paid back to Greece the BILLIONS of Euro's that were stolen during the seccond world war....! I think that would be a pretty good place to start helping the greek nation get itself back on the rails, or does your arrogance not allow you to remember far enough back to when you were raping your way across europe
The attitude of you Germans is absolutely beyond reproach.....oh, and by the way,, Happy New Year to you too.

It appears Germany wants to complain about subsidizing the poorer countries, but don't want to give up the Euro as not to jepeordize their exports to the rest of Europe.

Exactly. Natural pressures within the Eurozone making it difficult to sustain in the long run. Those natural pressures will not change because each country will still be competing with the rest.

I am a Czech and Germans did some bad things in our country, probably worse than in Greece (they had twice as much time for it). So I have zero sympathy with Nazi looting. Just to clarify my position, OK?

Yet I think that this argument that you give is very weak. Three generations have passed and the contemporary Greek problems are entirely of their own making. The impulse to look for someone else to blame, even into deep past, is very comfortable, but very dysfunctional.

But let us play a thought experiment. If Germany gave Greece several billion Eur now, what would happen? My opinion is that those money would be spent on generous perks for public employees and bribes on political figures (and their nephews strategically placed in big semi-public companies) within a year. And what then?

No offense but they probably did worse things to Greece, they had at least half a dozen Lidices... but I still agree with you, this sort of thing leads no where and the Brits are never giving up the Elgin Marbles either. Greece was a basket case in 1940 anyway, which is partly why the country was so wrecked in the war. But Comintern, or whatever it was called then, probably wrecked the place more and nobody is calling for reparations from Gazprom.

BAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAAH! I love it! Any time any nation anywhere has a budget shortfall, turn to Germany, shout "REMEMBER TEH WARS!" and hold their hand out. That should work once or twice.

No kidding. As an American, I'm beginning to wonder why we spent so much blood and treasure to keep Germany from dominating the Continent like they are any way.

When things blow up the third time, I say the Germans get to keep the place.

Funny you don't ask Italy for any money.

Or the Soviet Union.

I think the best thing that Greece can do is quit the Euro, it will leave them more room to manoeuvre their Economy.

If Greece does leave the Euro, and bring back the Drachma, ask yourself how Spain Portugal and Greece benefited from Tourism, holidays would be cheaper, beer food hotels.

Within 12 mths Greece would find a building boom for more hotels, an increase in air traffic, hire car rental, bars would be full again.

Where do you think people would visit Spain, Portugal, I do not think so, they would flock to Greece.

Greece would gain the hard currency that She needs to flourish, people would find more work, and the benefits it will bring to Greece would be ten fold.

I already here the doom mongers, who want to keep the Euro saying, it would not work because of this and that, its basic economics, and how many holiday makes would Spain and Portugal lose out to Greece.

You would have two more Economies leaving the Euro, at a later date when they see how well Greece is benefiting from once again running their own house.

This so called Euro Zone is not being built for the people, it is being built for an Elite few and their Families to enjoy for Hundreds of years into the Future, laugh if you like but you cannot hide the truth.

I hope Greece does show courage that the 300 Spartans showed all those Years ago, and go it on their own they will never do any good as long as they are stuck in the Euro,

Your analogy only works if you can identify who vote athenians are in this scenario and the logistical issues that prevent the German, I mean Persian army, staying in the field for a protracted period. Otherwise all you are asking is for the Greeks to die bravely. Everyone remembers Thermomplye, no one remembers the hundreds of battles and thousands of dead which led to the creation of the Persian empire. Those dead also showed courage I would imagine.

I don't think a country can only sustain its economy from one domain. Besides tourism is not an all year thing. And what about the rest of us?

For instance, I am a software engineer, I don't want to be someone else's servant. What about doctors, teachers and so many other professions?

Germany sees a fair amount of eurozone stability right now...

It's hardly stability when, for example, Italy's debt continues to increase as a percentage of GDP despite their running a primary surplus.
Germany appears to have no desire to end deflation in the eurozone; the sovereign nations are still responsible for their own debt, not the ECB; youth unemployment continues at socially destructive levels; growth remains minimal.

A Greek exit could well show such 'stability' to be an illusion.

"Nonetheless I think Germany wants them out."

Well, responding to this as a reader from Germany, this is an interesting claim as there has been little or no public discussion here advocating a Greek exit from the Euro. It may well be the case that many Germans, including policy makers, would wish that Greece was out, but I believe the most serious discussion of a method of exit concluded that it would be far worse in implementation than just somehow lumbering on. Germans like doing business and paying for their holidays in a common currency and if this has lead and will continue to lead to pain in Greece, well a nation of apartment renters like Germany is relatively unsympathetic to a nation of home (and often apartment in the city and home in the provinces) owners in Greece. I believe that Germany can actually work out a deal with a Syriza-lead government based around the wealthy actually paying their taxes and adjustments downward in the higher pay grades of the Greek civil service. Many scenarios include substantial deflation in Greece. While this is normally considered a bad thing for an independent state, can there not be advantages for a state within a currency union -- for competition, and for greater purchasing power for the poorest?

Did you ever negotiate with a Greek vegetable vendor?

This is all negotiation and posturing. Any concession by the EU is better than none. The bigger question is how much disruption will the negotiations cause and whether it is worth what will eventually happen. And, let's say that Greece exited and started to improve...what lesson would that be to Portugal, Spain and Italy? Germany should be careful what it wises for. Particularly if its banking system is still over leveraged.

Greece has had below-replacement fertility rates since 1982, a history of incompetence and indiscipline in public finance, and a history of falling for flagrant sociopathy and political malice among its voting public. It's just the problem child of the occidental world. Collectively, they can learn from the economic depression they are in and take remedial measures or they can shift the blame to some external irritant; the smart money's on the latter.


The long term demographic picture is awful.

In 2001 there were 2.3 million Greeks between the ages of 15-29. Now there are only 1.8 million and falling off rapidly. The young population is falling by 1.5%/year on a steady basis. That can only be described as a disaster.

We're seeing the same thing in many eastern European countries. The independence of some of these nations simply won't be viable in the coming years.

I like Nicholas Economides as an economist, particularly for network economics. But, he is also particularly interested and involved in the analysis of the Greek economy. Look him up and learn.
Here is a recent YouTube on Greece: https://www.youtube.com/watch?v=zfQKhXPbWtw His website on network economics is terrific.

Thanks for the link. Very interesting articles on Internet economics :-)

A few people in France ? The Front National made 25% last European election on a anti-Europe program (not just Euro, they want out of Europe/OTAN alltogether). The anti-Euro are getting a lot more traction recently. Troika taking every worst decision possible did not made it easier but mainly Europe is always the scapegoat for the blatantly incompetent political leader (both side). The same ones that try to defend it afterward...

A few people in France ?

The moderator's conception of 'few' and 'many' is regulated by the characteristics of his social circle, where they all want open borders.

It seems like a possible solution is for the Euro to temporarily split into two currencies: a high-valued Euro for the fiscally sound countries and a low-value Denarii for Spain, Italy, and Greece that are both run by the ECB.

Redenominate the debt of the southern countries into the Denarii with the ECB's legally backed promise that the Denarii would slowly be revalued over the next two or three decades to converge with the Euro. That way any bank that has loaned to the Denarii countries would be able to avoid major losses if they hold onto their debt until the currencies re-converge, while still giving the southern countries breathing room to grow closer to northern European economies standards in the short-term without the Euro straight-jacket.

Moreover, as the Denarii is run by the ECB (i.e. the Germans), it would borrow their anti-inflation reputation, protecting the currency from the issues that plagued Spain, Italy, and Greece pre-Euro, which were a leading reason why they adopted the Euro in the first place.

It would be a face-saving temporary separation instead of a divorce.

I strongly suspect, like most separations, it would be a way-station on the way to divorce.

This all assumes Syriza wins the elections and control of the government, which is a small chance in my opinion. Even if they had necessary support of the voters, I am unconvinced they would be allowed to win.

However, I think even if Syriza does win and is allowed to take control, they won't want to leave, and Germany won't push them out. I stand by my original prediction- when the time comes for the Euro to go to the morgue, it will be Germany doing the leaving.

That will be a big hit for German banks as all their (new) Euro denominated assets (loans to Greeks, Italians, etc.) steadily depreciate over time against their liabilities denominated in (new) Marks (deposits by Germans) appreciate as the Mark:Euro exchange rate steadily rises over time.

My understanding is that the German gov't thinks it's cheaper to throw good money after bad in sovereign bailouts (especially as other Europeans through the various EU institutions and the U.S. through the IMF pitch in) than it would be to bailout their own financial sector if either the Euro collapses or there is widespread (i.e. Italian, Spanish and maybe eventually French) defaults.

+1 for Kevin. During the 90's and beyond, the German banks had to find someone to borrow, and pay a higher interest rate. Moreover, they followed New York and London and became more leveraged and maintained their inefficiency in the process. Germany and its banks will suck wind if the Euro falters. They both need each other, but neither is willing to concede.

I'll give 100-1 odds that Greece won't leave the euro in 2015. This is a no-brainer.

There is no way to expel Greece from the euro. There is no legal mechanism by which the EU, ECB or euro members can decide cancel any euro member's membership. Trying to create one would scare markets about Italy, Spain, Portugal, Cyprus and the euro project as a whole. In any case it can't be done in less than a year.

Greece will not leave the euro voluntarily. There is practically no support and huge opposition in Greece to quiiting the euro. Even just trying to quit the euro would be domestic political suicide for any political leader. If Tsipras tried his party would turn against him. Besides, with a primary fiscal surplus, the financial purpose of quitting the euro just is no longer there.

There’s a high risk that Greece will default on its debts. There’s some risk that the ECB will place some kind of limitations or sanctions on the Greek national central bank. Perhaps the ECB could even go as far as suspending Greece’s ability to make international euro interbank transfers (TARGET).

I’m not offering any bets on “de facto” suspensions of euro membership or expulsions from the euro. I can imagine very unlikely but still possible scenarios, such as the Greek national central bank could go totally rogue, crediting euros to Greek banks and/or printing paper euros in defiance of ECB instructions not to do so, and the ECB could vote to deem euros printed in Greece or held by Greek banks invalid, turning Greek-made euros into a de facto different currency. To avoid quibbling I’ll make it clear: I win unless Greece is permanently expelled from the euro area through a legal process or introduces another currency not called the euro that replaces the euro as legal tender in Greece.

"I’ll give 100-1 odds that Greece won’t leave the euro in 2015. This is a no-brainer."

Well count me in for $10.

Or would you rather that 100-1 figure first?

$10 is good. Are you offering $100?

Internal devaluation in Greece is complete. Economic indicators are good. The current account is in balance, GDP growth was the third highest in the Euro Zone in Q3, and the government budget is only 1% of GDP in deficit.

If the Greeks leave the Euro Zone, it will not be of necessity, but because they may actually have that option for the first time. In economic terms, it is not clear it would have any benefit.

My take, plus a graph, is here: http://www.prienga.com/blog/2015/1/1/greeces-economic-outlook

As things are now, Greek MPs are elected using a semi-proportional representation system ( http://en.wikipedia.org/wiki/Semi-proportional_representation ) with an open list, mostly multi-member districts (but with number of representatives not well aligned to number of voters), and a 1/6th of the total seats as a bonus for the 1st party. This system looks designed to bolster demagoguery and trading votes for favors. A reasonable decision for Greece would be adopting an MMP system ( http://en.wikipedia.org/wiki/Mixed-member_proportional_representation ) with at least a heavy majority (at least 2/3) of non-constituency MPs selected from a closed-list. While this is no solution, it could be first step towards some top-down improvement.

I am already on record as disagreeing with Tyler, he having previously noted my comment that said that if Syriza wins, the politicians will cut a deal as they have done before. I shall simply note two points, both already made by others.

One is that there is no evidence of any desire in Germany for expelling Greece. Tyler may be making what sound like reasons they might want Greece out, but people in Germany are simply not talking about it, so it is not very likely.

More serious is the point that an exit from the euro would also be an exit from the EU as well, and the way things are set up, this is something extremely difficult to do. And, indeed, Germany cannot expel Greece, although they might engage in financial actions that would make life a lot harder for the Greeks.

I also think that the other scenarios some have mentioned such as Germany leaving or a two-tier euro, while possibly good ideas, are simply nowhere near being on the table practically and will not happen.

BTW, I do not absolutely rule out Greece exiting, and I am not making any bets, but I think it is not likely.

BTW, looking at the graphs, what I see is that so far there is no run on the Greek banks, but the risk of a default has increased. I would agree with the latter. But a default does not mean necessarily that Greece exits the euro (and EU), either on its own or by force.

Hey all you political experts. Even in Greece scaps the euro currency and defaults on the super rich it won't make any difference. The German Jews are trying to running the euro and control the Middle East and the USA, Canada, Aussie, etc.. Control a countries currency and watch how you can rule. Real story should read ""EUROPEAN COUNTRIES WHO JOINED THE EURO ARE ALL BANKRUPT" EXCEPT FOR THE GANGSTER GERMANY and its master plan to reel all countries in by saying we have to become one or else. Germany set the trap for the common man together with all there bought politicians in each country. And now they look like the victims cause the euro countries can pay the back. Don't you get it? It like any credit card they never want you to pay back the loan. They just want to own and control you.

Stop that! There are no German Jews in Germany anymore! Of all ideas about Greece and the Eurozone, this is the most bizarre.

Early contender for worst comment of 2015?

Correct. JR is definitely a contender, getting an early start for worst comment of the new year.

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I think Cowen's arguments are correct, but from here -- inside the eurozone -- I just don't see it happening. Yglesias will probably be right, sad to say. I hope Cowen to be right, though.

Also, the eurocrisis has proved Germany to be a role model for Europe. Germans have done their utmost best to be respectful, generous & fair to countries like Greece. To open up old wounds is very wrong, it'd give Germans the idea that they can never be forgiven. That would be a grave mistake, Germany has a reason to be on their best behaviour; they want to leave the past behind. We should commend them for it, not make them feel they can never be right or object.

Here in the Netherlands, popular opinion must be much more negative towards countries like Greece than Germany. So, please don't make the Grexit idea a German position, it's a Dutch-Austrian-German-Belgium-Finn-etc position.

With Greece leaving the chances other countries leaving will rise substantially. That is a bet Germany didn't make in 2011 and will not make in 2015. But if they make the bet they recognize that the euro is the biggest mistake in recent history. It's impossible to forecast what will happen if the euro collapses, the European Commission, the ECB and the like want us to believe that the costs of collapsing the euro are greater than keeping the status quo, that is a long run lie.

Quick and super-unscientific generalization: Greeks who have money want to stay in the Eurozone, and predict disaster otherwise. Greeks who do not have money are either indifferent, or openly hostile both to the Euro project and to a lesser extent the EU in general. In the present circumstances, the latter outnumber the former. Also, those on the bottom tiers of the economic pyramid suspect strongly that whatever 'aid' comes from Europe goes disproportionately to those who plundered and wrecked the system in the first place. Any bloviation about shared sacrifice to get us through tough times is dismissed, rightly, as "malakies." Also, people are re-examining their legacy political affiliations. The politically homeless from the old KKE and others far and further to the Left than SYRIZA, who specifically want a 'grexit' from the EZ and the EU, are considering SYRIZA as an option; it is no longer reliable to assume that internecine squabbles among the left will neutralize their voting potential. Samaras squeaked in with a coalition including Democratic Left, who I don't think are going to play nice this time. Also, the self-aggrandizing has-been Aleka Paparriga (KKE) is no longer in play. I predict SYRIZA will win. What happens after that depends on Frau Kanzlerin.

Why can't Greece (partially) default and keep the Euro? Millions of people file for bankruptcy each year who use the USD, yet they can still use the USD after their default.
Also, it's hard to prevent anyone from using the Euro. Some countries who are not even in the EU have the Euro as their official currency (Kosovo and Montenegro), many other countries as their second currency (my landlord in Romania prefers Euros over Lei).

It would be funny if Greece will then introduce the Deutschmark.

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Not one single word about how the anti-European movement stands to clear up the corruption problem. Not one group has yet to stand up and clearly mention the gross idea of the corruption that takes place. All you hear are the racial slurs of the Greeks who wish to say Germany is at fault for there own poor showing of how to make it in life. So no matter how much you give them to bail-out no matter how many programs of reform of any kind they may or not have . In the end they will default . There idea is pay no taxes to live in a country that allows them to do as they please. Well I´m sorry for you Greeks and you Spaniards as well at the Italian those from Portugal and Ireland as well as any other country who has corrupt like systems that rob there people of a fair chance of making in living in a free world. So in the end its simple if you don't wish to be on the boat hey jump and swim and be on your own and see how far you get without the help of the Eurozone.

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