So what’s the problem with Grexit?

Not for Greece, that is clear, rather for everyone else.  Given bank recapitalization, the introduction of the European Stability Mechanism, European QE, a more general flood of liquidity to European banks, and a burgeoning European economic recovery — by European standards that is — it seems Grexit stands a good chance of being a non-event at the global or even the European level.  After all, Greece is only a small sliver of EU gdp; a few years ago it was only two percent, now presumably it is less.  On top of that, most of the remaining Greek debt is to public sector institutions, not private banks, which ought to limit contagion effects.  Indeed, as Greek bond yields rise, these days the bond yields of the periphery nations do not rise in tandem; some in fact have been falling.

So what’s the problem?

I think 80-20 that Grexit would not become a major macroeconomic problem for other countries, with the possible exception of small Cyprus.  But where does that 20% come from?

If Greek deposit flight forces a form of Grexit, whether whole or partial (capital controls plus scrip?), there is a good chance that markets will in essence “ask” the ECB again just how firmly it stands behind the other troubled eurozone member nations, such as Portugal.  The danger is that the current “creative ambiguity” cannot be disturbed in a useful way.  It might be hard for the ECB to announce that it stands fully behind the other eurozone nations, and in effect promise to monetize any pending default.  The incentive for moral hazard would be too destructive, and besides governments such as that of Spain don’t want to encourage the anti-austerity opposition.  The ECB is therefore likely to make a public commitment less extreme than that.

But neither will “we don’t really stand behind these governments at all” do the trick.  That probably would induce contagion along some other parts of the periphery, maybe more.

The ECB therefore must choose some intermediate point to signal — “we are committed, but member nations still bear fiscal risk.”  In part that is why they have rearranged the ex ante guarantees to fall so firmly upon national central banks, a move which some have compared to turning the euro into a currency board system.  Ex post, of course, the ECB or EU still has the discretionary option of bailing out those central banks, if and when it chooses to do so.  And, following Grexit, they could credibly say “The EU would have bailed out Greece, had an agreement on structural adjustment been reached and previous commitments honored.”  That’s basically a repeat of previous messages and maybe it is good enough.  That is where the 80% comes from.

So which ingredients will shape the new (old) message?: an intelligent but constrained ECB with a highly restrictive charter, a Europe-dedicated and wishing to atone for Grexit but electorally cautious Germany, a bunch of periphery nations which basically want any and all guarantees reserved for themselves and not for opposition parties, and lots of other voices, all mixed into a more or less unprecedented shock surprise in modern financial history.

So will the ECB get the signal right? Did I say 80-20?  Can I change that to…um…70-30?


So, eurogeddon has been postponed, or is it only 1 in five odds?

Mood affiliation would suggest that Prof. Cowen really, really wants to be right about the failure of the euro (which is inevitable, one should always note) on his timeline, and such a delicately written piece in 2015 could be seen as a far sighted prediction of the path of the euro's end. Unlike some of the earlier posts, this one at least allows for the sort of Spielraum that all good columnists learn to include in their writing.

However, this should not pass without comment - 'want any and all guarantees reserved for themselves and not for opposition parties' Europe tends to be filled with countries where governments are composed of 'opposition parties' working together. To take the lazy example of a European country that Prof. Cowen knows about, the CDU and the SPD share power in a 'große Koalition' - though each are decidely opposed to each other.

Multiparty democracy seems to be a particular blindspot for Americans, as they have essentially no experience with it. And also explains why public choice theory is considered so vapid in a country like Germany - yes, people always follow their perceived interest, but when it is possible for a group of people to form a new political grouping and force change, maybe the idea of interest is broader than a mere division of the spoils, but might instead include goals based on convictions - such as that nuclear power is far too expensive and hazardous to continue, regardless of what that means to the profits of several major components of the German economy. The fundamental reason that Germany is turning off its nuclear reactors is that a majority of Germans have clearly expressed this desire over decades, in the meantime supporting a party that did not exist 4 decades ago.

Your point about multiparty democracy is incredibly asinine and misdirected. "Opposition parties" are the parties not in power. The fact that the ruling parties may consist of a coalition that disagrees about stuff doesn't matter at all to Tyler's point. But, as usual, you bring up some irrelevant, off-topic point and then act like the omission of this point proves ignorance.

As for your broader point, the long-term sustainability of the Eurozone is one question and the short-term effect of Grexit is another. Grexit might not be catastrophic for Europe systemically, but that doesn't mean that countries like Portugal, Spain, Italy, and France are suddenly doing fine.

N.B. I just used "Europe" to refer to countries on the Euro, which clearly means I don't know the difference between Europe, the EU, the Eurozone, and the Schengen Area. Ignorant American alert!

Well, the general term is countries using the euro. In the similar sense that one says the Californian economy uses the dollar, and is not on the dollar.

But don't worry, all the countries in Europe have to deal with the euro, whether within or outside of the eurozone - much like how the smaller countries in NAFTA have no choice but to deal with the dollar's dominant position in that free trade zone.

'“Opposition parties” are the parties not in power.'

Really? The FDP and the CDU have worked together for more than a generation - but currently, the FDP is not in power. To think that the FDP is now a CDU opposition party could be considered asinine and misdirected - if the FDP had won enough votes, the CDU would be in a coalition with it, as it was beforehand. The same applies to the SPD and Greens, by the way, just to show how an 'opposition' party is not merely the one currently not in government, as the Greens and the FDP are quite opposed to each other (if only because they attempt to attract much the same demographic - more educated voters with above average incomes that tend to be more concentrated in urban areas). The SPD and CDU are considerably more opposed to each other than the SPD/Greens or CDU/FDP. (And as for the Greens and CDU working together - well, it happens, but that is more regionaly based, occasionally occurring over the last decade - not that anyone thinks the CDU and Greens are anything but opposing parties, sharing power in government or not.)

'The fact that the ruling parties may consist of a coalition that disagrees about stuff doesn’t matter at all to Tyler’s point.'

In Germany, regardless of being in the opposition or in power, there is no disagreement about the importance of the euro and the (official) desire to retain it - so what would be Prof. Cowen's point when talking about German policy and the public choice aspect of the German parties in power wanting to ensure that 'opposition' parties gain no advantage from ECB arrangements? (Which would then go into an interesting discussion of the AfD, and how all of the current parties in Germany want to freeze out the AfD by continued support of the euro - thus demonstrating the irrelevance of the AfD as being 'serious' when representing German policy- do note that is German policy, not CDU or Linke policy, in pointed contrast to Prof. Cowen's broad perspective). Of course, he did limit his observation to 'periphery nations,' but really, what is different about politics now that hasn't been true for decades? Well, apart from Prof. Cowen's preferences for 'serious' policies, and not those motivated by democratic action in a multi party democracy, where the concerns of voters need to be addressed if a party wishes to retain its position. Any party in Greece promising a way out of austerity will win votes - and to think that Syriza would abandon its attempt to lift austerity's burden due to its fear of the 'opposition' also opposing austerity and gain votes is to truly miss the point of how multi party systems work. Greek policy is not just party politics - no Greek party has any hope of winning an election in the foreseeable future by promising more austerity.

Power ebbs and flows in multi party systems - it is not a teeter-totter, like in the U.S. And the one thing that unifies those two American parties is the abject terror that someone else will push them off. Multi party systems resemble a carousel, where any number of people can share space. Syriza may fall off such a carousel any time, for example - but many of its positions will remain relevant, and another political grouping will arise to represent them and gain voters, possibly under the name of an already existing party, or a new one.

No. "Opposition parties" means parties not currently in power. The term is not about how much parties agree with one another; it is about who is running the government and who is not.

FDP is an opposition party; the fact that they may have a lot of common ground with those currently in power (and even ruled along with them in the past) doesn't change that.

This is not always the case... in the Rutte I government in the Netherlands, for instance...

'“Opposition parties” means parties not currently in power.'

Well, in the British tradition, which historically is also pretty much dominated by two parties, that is true. And there is no question that a similar distinction is made in German (with the same term), to distinguish between the parties in power and those not. However, no one thinks of the FDP 'opposing' the CDU in any broad sense (which remains one of the FDP's major problems, actually), whether they are part of a coalition or not.

'it is about who is running the government and who is not.'

Well, maybe - the FDP didn't suddenly abandon all of the positions that is shared with the CDU, and very often (not always, of course) votes the way the CDU does. It isn't zero sum, after all - being in the opposition doesn't mean you don't support 80% or 90% of what the current governing coalition is doing. And it is quite possible for two parties in government to disagree with each other (on points that they could not resolve before assuming power) and that it is 'opposition' parties that ensure one governing party's position wins over another governing party's position. (This should be interesting terms of current German law making regarding data retention - the FDP and the Greens are resolutely opposed to such data collection without suspicion, as are many SPD and CDU politicians.)

This is a distinctly different way to govern than found in the U.S. The SPD and Greens certainly disagree on a number of points - but those disagreements essentially remain regardless of whether one or both are in power, and the points they agree on remain valid in the same sense. And it is quite possible that the Greens and the CDU, who disagree on quite a lot, will become a future ruling coalition. A potentially ugly one, admittedly - but one that both parties consider to be in the interests of winning future elections (or holding current power, of course - again, that is a self-evident observation). And the CDU will not consider the FDP to be in the opposition, but instead count on FDP votes to help it maintain power in opposing the Greens in policy making, the party the CDU is ruling with.


It just occurred to me that possibly, the idea that a government essentially lacking an executive in the American sense might be part of the problem here. All of the parties in the Bundestag/Bundesrat represent the 'government,' to the extent that they need to pass/approve legislation/policy (a fierce political debate in itself) - and it certainly happens that a party ruled Bundesland opposes a same party federal goverment policy, and thus it is the same party (in power at the state level) that stands in opposition to the party (at the federal level, in terms of the Kanzler/in). In other words, the party in power loses because the party in power voted against itself. Which makes the term 'opposition' somewhat limiting, as German parties tend to be organized more at a state level than a federal one (which is why there has been no mention of the CSU in any of these examples - and the CDU/CSU are two parties, who do not move in lockstep, but who are always together, whether in power or in opposition).

"Well, in the British tradition, which historically is also pretty much dominated by two parties, that is true. And there is no question that a similar distinction is made in German (with the same term), to distinguish between the parties in power and those not."

So what are you disagreeing with, then? You attacked Tyler for using a word for what it actually means (in English and German, apparently).

Well, there wasn't Eurogeddon but there was a 20% slip between USD/EUR currency exchange during 2014. There wasn't Eurogeddon but some europeans trust more Swiss Francs than Euros. These non-events have already happened without any major trigger like national debt default or severe political instability.

p_a it's not about your personal trust on UE's institutions, it's about what other people think. Let's look at the EUR/CHF exchange rate in the following months. You may find that other people think different.

such as that nuclear power is far too expensive and hazardous to continue

Expensive I get but the hazardous case is not so easy to make. Nuclear power has been much safer than most other ways of making electricity.

Until you consider tail risk. Nuclear power may be clean and safe 99.9% of the time, but if the costs associated with the 0.1% are high enough, it could still be a far more destructive form of power generation.

Natural disasters, terrorist attacks, disrepair, human error, wars, unforeseen circumstances and dangers... are we really comfortable with widespread use of a technology where if something goes wrong, it has the potential to affect an entire continent and devastate the ecology for tens of thousands of years?

What will be the popular reaction in GER when the polity discovers that its on the hook for Target 2 balances from GR deposits in GER banks?

I'm still waiting for Ambrose Evans-Pritchard to give us an update on the article he wrote about how Germans were rejecting Greek euro notes - an event that apparently only he noticed.

We know .............. sigh ................... :-(

There is no "creative ambiguity".

For countries running into trouble, like being attacked by speculators, there is the ESM with 500 billion capital, subject to approval by sufficient majorities (including a de facto (> 25%) blocking veto by Germany) to be satisfied with turn around programms.

And behind that is the very credible threat of OMT, unlimited money printing, if that would be necessary.

And with a current account surplus of about 400 billion $ a year by the EuroGroup nobody doubts the stability.

That is why interest rates are negative for up to 8 year German bunds, and for everybody but Greece lower than for the US.

The gross government debt for the US is larger than for the EuroGroup, page 3

Greece just has to learn, that the whole rest, all other 18 countries, will just not give in to some blackmail by 1 tiny 2% country throwing a tantrum.

And the German population (with a pulse) is very well aware of the interest free 500 billion Euro Target 2 credit we give the rest of the EuroGroup, as ca 15% of our GDP, not to be sneezed at.

The fund exists, but who knows whether this fund will actually be used, and to what extent? I note that you said "subject to approval by sufficient majorities" and "including a de facto...blocking veto by Germany". Nobody knows how far the rest of the EU will go to bail countries out. They could go a lot farther, but that doesn't mean they will. Therefore nobody really knows the answer to questions such as whether Greece will exit the Eurozone.

There is definitely creative ambiguity.

While often disagreeing with prior_approval,

I find his remark, that Americans with their extreme 2-party system have no experience with coalition governments and therefore,
a hard time understading the dynamcis, as to be seen here. Nothing asinine, but worth to note that.

That whole sentence ("atone for Grexit", .... huuugh??, "any and all guarantees reserved for themselves" ??, as if thee would be in any way related to a party) and those endless attempts to frame this as Germany vs Greece or even vs "the many" , what is vey clearly one tiny cheating Greece vs the whole rest, just as it was for Cyprus April 2013 shwos massive misunderstanding, very common, and often on purpose from others, who do not like nor understand the Euro.

The ESM, fiscal compact, banking supervision and resolution were designed specifically for situations like this, and especially the very predictable Greek tantrum, and exactly to give neither speculators, other aggressors, the rumour mills nor a recalcitrant debtor a chance to trick the system. Nothing ambiguous about that.

The Greek open to ignite some kind of "southern riot" is dead.

Even the Podemos heydays in Spain are already over, please note,_2015

and the new rising star "the C's"

"The leader of the party uses the phrase: "Catalonia is my homeland,
Spain is my country and the European Union is our future" to outline the
party's ideology."

“The leader of the party uses the phrase: “Catalonia is my homeland,
Spain is my country and the European Union is our future” to outline the
party’s ideology.”


The ONLY way for Greece to have a future is to default now, and exit the eurozone. Actually they should have done that 4 years ago, and likely by now we would not be speaking of Greece at all. Everything else is just missing the point: In normal circumstances, Greece does not have a strong enough economy to stay in the Eurozone. Much less, with their unemployment or debt levels (yes, they needed some extra government spending to camouflage this, but now it wont work anymore) ... The thing is no one wants to get the blame, german politicians dont want to be responsible for maybe a couple of banks going bankrupt, greek politicians dont want to face the inevitable responsability for leaving the eurozone.

BTW, this also for other countries like Slovenia, Portugal, Croatia, ....

How about Greece actually try to, you know, have a good economy?

In Portugal even today, a large portion of students do not even complete high school. A generation ago analfabetism was not so uncommon. Now try to compete with Germany with those numbers. Obviously entering in the euro was a huge mistake.

That's the problem with Grexit: contagion that will erode confidence on the Eurozone and destroy the currency and drag member nations into economic chaos.

Greece will not become a more competitive country just because they have their own currency, their reforms will be painful in any scenario if they aim to create a competitive economy. Greece should be allowed to default but stay as a member of Eurozone but they must commit o reform their troubled nation.

Greece is not China, a weak currency will not make them a global exporter of textiles and iPhones. They will get more tourists probably but olive oil exports will not save them...

>The ONLY way for Greece to have a future is to default now, and exit the eurozone.

And also pray that its creditors forgive all the debts, right? Because none of the new debt is issued under Greek law. Just because they default doesn't mean the debt disappears.

I don't understand this point. Default would mean they ain't gonna pay. Since Greece is a sovereign nation, there is no (plausible) mechanism to make them pay. Yes, there would be a punitive response (such as getting kicked out of the Euro), but default would be an intentional choice of that set of consequences over the consequences of continuing to have a big pile of debt.

>Since Greece is a sovereign nation, there is no (plausible) mechanism to make them pay.

Tell that to Argentina.

Sure, you can't go into Greece and start taking stuff. But you can prevent them from ever accessing the markets again.

How do "dollarized" countries such as Ecuador, El Salvador, or Panama cope with being part of a larger currency whilst having no recourse to its central bank? Ecuador has a similar size and population to Greece; it switched to the US dollar around the same time that Greece switched to the Euro. Obviously they are very different countries, but I can't help but notice Ecuador's significantly better outcome.

Wouldn't Greece be better off keeping the Euro but defaulting and abandoning the protection of the ECB?

This would seem both the politically easiest and probably best overall solution, yet no one seems to consider it.

Dollarized economies don't automatically become eligible for the risk and borrowing rates of the US treasury.

It isn't the euro or common currency. A small country with a floating currency is doomed to being substandard. 20% fluctuations on a quarterly basis are not circumstances that encourage long term investment and growth. Having a stable exchange rate or stable currency removes a substantial portion of the risk to any transaction. It also applies a certain discipline where devaluing isn't an option forcing a certain sensibleness upon the pond scum that make up the worldwide political class.

The problem with the euro and Greece in particular is that it allowed them to borrow far too much money. Now even with the previous substantial writedowns they still can barely make interest payments. The dysfunctional political environment will take seemingly unlimited borrowing capacity as a personal bank account and will do all sorts of cockamamie things and avoid doing the hard work of building a functional bureaucracy and institutional wherewithal to support an economy.

I blame the German and northern European economies constructing a vendor financing plan for their industrial output. It has failed.

"A small country with a floating currency is doomed to being substandard."

What about Switzerland, Norway, Denmark, Sweden, and New Zealand, to name a few? These don't seem like substandard countries.

Are there risks of being a small country with a floating currency...or are there just risks of being a small country, which take different forms based on one's fiscal arrangement? It is not clear that small countries with floating currencies are underperforming those with other arrangements.

Which ones of those are not strongly resource base economies? If you look closely at any manufacturing what happens is that they import components from where they export finished goods. The currency fluctuations favor resource development.

Or they have market leaders and drivers in specific manufacturing market segments. Denmark has multinational names with manufacturing set up in the large market countries.

In about a year Canada has seen its currency against the US dollar go from $1.05 to $0.80. That change eviscerates profit margins, and makes an already marginally competitive manufacturing sector just not worth it.

> "It also applies a certain discipline..."
That's precisely what Greece needs.

How high would interest rates in Greece be if they continued to use the Euro but no longer enjoyed the support of the ECB?

Exactly, and more to the point dysfunction happens when it has space to grow without apparent negative consequences. And while eliminating dysfunction is much harder, but that only happens when the limits are reached.

All leaving the euro would do for Greece is give it another few years to get even worse by letting its floating currency mask its fundamental problem, while giving that currencies utter collapse as a further excuse.

Panama has a huge dollar income source to pay for its imports.

Ecuador does as well, though besides oil and banana exports it is illegal. Officially its called remittances, but its really drug trade that offsets the trade deficit not offset by outsiders buying up Ecuador assets.

Greece defaulting and switching from gasoline to mules powered cars a la Cuba would be interesting. In 50 years, visiting Greece and seeing 2010 cars pulled by donkey's would be cool.

The last time Germany controlled the fate of Europe, that outcome too was in doubt. To Germany's credit, this time as well as the last, it is willing to stick to its principles notwithstanding strong opposition - it's part of the German character. But, alas, the last time Germany failed in its determination to control the fate of Europe and, by extension, the fate of the world. How about this time?


Thanks, the original post was too subtle for me to understand.

The problem of a Grexit actually seems like the quickest way to solution. Tear off the band aid and the world will move on. (in 12 months, Greece will end up like Iceland with a much lower unemployment but a lot lower wages.) However, Grexit will become a Euro political failure and the next round of financial failures will be more difficult to resolve. Considering Germany is gaining such high reserves they could play the Japan role in the Europe flu of 2024 and the other nations/banks will simply default quicker.

That said do we need an International Bankruptcy court and version of "Private Equity' firms for bankrupt/civil war nations. Even if the Civil Wars ended today Syria, Yemen and Ukraine are economically screwed and might be better off breaking up and being attached to larger nations.

That or in 12 months Greece will not have a functioning state (or will be subsidized by Russia).

Yes, the contagion isn't Italy or Spain, it is northern Africa failed states.

How is everybody so sanguine about the ability of the "Very Serious People" managing the Euro institutions and the Troika, in being able to handle a Grexit, and all its unforeseen consequences is beyond me (Tyler barely even dips his toes in the potential issues for the Euro as a currency regime, as well as the whole Euro project of a Grexit)? These individuals and institutions have failed and have repeatedly proven to not be able to manage this issue.

I think everybody should read the chapter in historian Niall Ferguson's book "Cash Nexus" which talked about a failed "EU" type currency union, complete with cheating Greeks and austere northern European partners...back in the late 19th century. It's history repeating itself today.

The biggest blow at this point would be to the debt positions of the Euro Area governments. Besides the €195b of debt Greece owes to them and €27b it owes to their central banks, there's €139b exposures to the Bank of Greece - amounts that other Euro central banks would have to be recapitalized if the BoG quit the euro and defaulted on its liabilities to the Eurosystem.

So all told a €360b write-off, or about 3.5% of area GDP. Not a killer since it's on the fiscal balance sheet and the banks hardly hold anything anymore. Which is why they're being very tough with Tsipras.

But I think if Tsipras was going to default he would have already.

I explained how those exposures add up here when it was two months ago and they were €117b:

The new raw data is here:

Default means cutting imports to Greece, like oil. Do you think the Greek economy is ready to go green and not depend on fossil fuels?

I guess it is not obvious to me that a Grexit is no problem for Greece, particularly when under current arrangements it will apparently also involve an exit from the EU itself as well as the euro.

One obvious problem is that with the new drachma obviuosly getting seriously devalued while Greece's foreign debts remain in euros, its foreign indebtedness situation will become completely untenable. I guess Tyler is assuming here that the Greeks will simply totally default and renege on those debts, but this will more or less completely shut them out of world financial markets for some time to come, probaby indeed throwing them into the lap of Russia or somebody else not too savory for some kind of financial support. I do not think Iceland is a good comparison, although Argentina might be, which did grow smartly a few years after its collapse, but has since fallen on bad times. But in the immediate aftermath of the collapse of the Argentine peso, living standards collapsed in Argentina. Note that living standards in Greece have already declined substantially as Greece has put in place the harsh austerity demanded of it, leading to a primary surplus. One can blame the Greek voters, i suppose, for not sticking to it and voting for these awful Not VSp leaders, but they have arguably suffered a lot more than any other nation in the eurozone, and the prospect is not as Tyler says, oh wonderful great sailing full speed ahead, but a near term serious catastrophe of living standards.

So, maybe Varoufakis should have gone to dinner, or at least put on a tie, and ignored that all the other boys hate him for telling them unpleasant truths. OTOH, it may be that this may be a neat way to get back to that muddling through deal that really does not in substance seem all that far off, once one puts aside all the strutting and breast beating, with ome of the worst being done by people like Schable, who are really nauseating when one looks closely at how they have behaved, these supposed VSPs putting to shame some of the more ridiculous ones in Washington. So, YV gets put aside while remaining officially in place, and this new technician gets brought in (probably wearing a tie and being obseqious, especially to Herr Schabule) to close that really quite small gap that can let Draghi keep the Greek central bank afloast and avoid an outcome that is likely to be a lot worse than what Tyler is forecasting.

1) I don't think Europe will let Greece go. They will let them miss target after target, it could go on for quite a while. Yes, Europe will complain, but they won't "pull the plug". It is like Vietnam, no one wanted to be the President who "lost it".

2) Should Grexit happen, Greece is going to be wiped out, and Europe will have to deal with economic refugees looking for food. Labor costs are not the problem, Greece has already "internally devalued", and it doesn't help when you have the lowest economic freedom levels and highest corruption levels in the Eurozone. Once everyone in Greece takes a 50% or more haircut on all bank accounts due to Drachmazation and the massive economic collapse occurs, no other country will dare follow. Besides, do we really think Syriza will keep Drachma inflation under control for any length of time? Things will only get worse.

Do you think Saudis will sell oil to Greece in drachma?

Will Putin sell oil to Greece in drachma with no strings attached?

Greece is in debt because it runs a trade deficit. Greece is currently like the US because it can borrow money to pay for its trade deficit.

Grexist is the equivalent of all the nations with dollars cutting off the US from the international dollar zone, demand payment in yen or Euro or pounds for exports to the US.

Let me ask Tyler this:

Would you go to Greece to speak if you have to pay for your trip in dollars: hotel, meals, etc, but were paid in drachma including all expense reimbursements?

Italy survives Grexit?

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