Is Europe playing chicken with Greece?

 

Larry Elliott, Economics editor

guardian.co.uk, Wednesday 23 May 2012 19.48 BST

If the idea of talk about contingency plans is to scare the Greeks off leaving the single currency, it seems to be working

Greece's exit from the euro could have catastrophic consquences – but staying in could be worse. Photograph: Orestis Panagiotou/EPA

The world's biggest ever game of chicken. That's one way of looking at the noises coming out of Brussels and Frankfurt on Wednesday, suggesting that each eurozone country is drawing up contingency plans for a Greek exit from the single currency, that such an eventuality would actually be no big deal, and that Athens might be offered a €50bn (£40bn) sweetener if it decides to call it a day and bring back the drachma.

If the idea is to put the frighteners on Greeks ahead of next month's election, the strategy appears to be working. Support for Syriza, the party led by Alexis Tsipras, is dwindling as Europe's policy elite sends out the message that there is no middle way between sticking to tough austerity on the one hand and leaving the euro on the other.

The next phase of the strategy, assuming that is what is happening, will be for the stick to be replaced by the carrot. Having softened up the Greeks with blood-curdling warnings about the ramifications of seeking to rewrite the terms of the bailout it agreed earlier this year, a few hints will be dropped that perhaps, after all, some of the conditions could well be softened as part of a pan-European attempt to boost growth.

But not yet. The election is still the best part of a month away, far too soon to ease up on the propaganda war. Hence, the report from the Bundesbank that a Greek departure from the single currency would be "manageable" and the leak to Reuters that eurozone members are drawing up individual contingency plans to minimise the fallout on their economies.

Europe has form when it comes to ensuring that electorates vote the "right" way. When the Irish voted against the Nice treaty in a referendum, they were told to go away and have another try, which they duly did. So it would not be entirely surprising if there was a co-ordinated campaign under way to put the arm on the Greeks.

Playing chicken, though, can be dangerous, especially when the stakes are as high as they are at present. One risk is that all the talk of Greece's departure puts the financial markets in a total panic, adding to the already severe pressure on Europe's fragile banks. There were signs of this yesterday, with a big sell-off in shares on all the European bourses and a fall in the euro against the dollar to its lowest level in more than two years. If this is a big bluff, the markets have yet to twig it.

The second risk is that even if the Greeks do return to the centrist parties that support the austerity programme, nothing will have changed. Greece will still be deep in recession and stuck with a structural adjustment plan that is failing. Markets may well rally, but only until investors work out that the can has simply been kicked down the road again. This shouldn't take them long.

Dario Perkins, analyst at Lombard Street Research, said that for as long as Greece remained in the euro, there could only be a solution to its crisis if the EU's policy became radically more growth friendly. "If that doesn't happen, Greek exit is just a question of timing. And with those same austerity policies now widespread in Portugal, Spain and Italy, pressures on the euro will continue to build."

It is, of course, possible that the rest of the eurozone really has had it with Greece. These are not pretend preparations, in other words, but a recognition that Greece is close to the edge and Europe needs a comprehensive blueprint in place to prevent the dominoes tumbling.

The imperative will be to prevent a messy Greek departure that results in bank runs, capital flight and soaring bond yields putting intolerable pressure on Portugal, Spain, Italy and Ireland. Athens said reports of contingency plans were false and it's easy to see why, since even mentioning the possibility that the eurozone is preparing for life after Greece makes departure more likely.

Lurking in the background is the fear that Europe does not really have a plan at all, that it is not organised enough to play chicken with the Greeks and is still in denial about the possibility that the single currency may start to fragment.

The fact that within minutes Greece's "no contingency plans" line was flatly contradicted by Belgium was consistent with the hapless way the crisis has been mismanaged in two and a half years of can-kicking and added to the impression that the current crowd could not organise the proverbial knees-up in a brewery.

It would also explain why investors, as they showed on Wednesday, are prepared to lock their money away at a loss in two-year German bonds rather than expose themselves to any euro risk.

Is Europe playing chicken with Greece? | Business | The Guardian