The [Greek] European Tragedy: Greece should seize Germany's botched offer of a velvet Grexit

By Ambrose Evans-Pritchard 16 July 2015

The Versailles terms imposed on Germany in 1919 were vindictive and narrow-minded, but not beyond reach. Greece is being told to do the impossible

A children's tea party is held in an East End street in London, to celebrate the Treaty of Versailles at the end of the First World War Photo: Hulton Archive
One day we will learn the full story of what went on at the top levels of the German government before the villeinage of Greece last weekend.
We already know that the EMU accord - if that is the right word – is an economic and diplomatic fiasco of the first order. It does serious damage to the moral credibility of the EU but resolves nothing.
There is not the slightest chance that Greece will be able stabilize its debt and return to viability under the Carthaginian settlement imposed on Alexis Tsipras - after 17 hours of psychological “water-boarding”, as one EU official put it.
The latest paper by the International Monetary Fund has torn away the fig-leaf. The country needs a 30-year moratorium on debt payments and probably outright subsidies to recover from the devastation of the past six years.
Instead it gets pro-cyclical fiscal contraction of 2pc of GDP by next year.
Some are already comparing the terms to the Versailles Treaty but this does not quite capture the depravity of it. The demands imposed on Germany in 1919 were certainly vindictive and narrow-minded – as Keynes rightly alleged – but they were not, on the face of it, beyond reach.

A protester is arrested by riot police following clashes in Athens
France was forced to pay reparations after the Franco-Prussian War in 1871 that were roughly equivalent to Versailles, albeit in very different circumstances. It dutifully did so, while plotting revenge.
What Greece is being asked to do is scientifically impossible. Almost everybody involved in the talks knows this. Yet the lie goes on because the dysfunctional nature of EMU politics and governance makes it impossible to come clean. The country is dishonestly kept in a permanent state of crisis.
Wolfgang Schauble is one of the very few figures who has behaved honourably in this latest chapter. As readers know, I have been highly critical of the hard-bitten finance minister for a long time, holding him directly responsible for the 1930s regime of debt-deflation and contraction imposed on much of Europe, and for refusing to accept that the Eurozone's North-South divide must be closed by both sides. Any policy that puts all the burden of adjustment on the South is destructive and doomed to failure.
But he is entirely right to argue that a velvet divorce and an orderly exit from the euro for five years would be a “better way” for Greece, as he did on Germany radio this morning.
It would allow the country to regain competitiveness at a stroke without a disastrous over-shoot or the risk that events might spin out of control. It would clear the way for proper debt relief – or a standard IMF-style package.

^{The leaked plan from the German finance ministry}
If accompanied by some sort of Marshall Plan or investment blitz – as Mr Schauble appears to favour – it would set the foundations for genuine recovery.
Huge sums of Greek money sitting on the sidelines would probably flood back into the country once the Grexit boil had been lanced. It is a pattern seen time and again in emerging markets across the world over the past 60 years.
Instead, total confusion remains. “Nobody knows at the moment how this is supposed to work without a haircut and everybody knows that a haircut is incompatible with euro membership,” said Mr Schauble.
To those who say that Grexit would violate the sanctity of monetary union – with incalculable political consequences - one can only reply that it is already too late. The moment Germany tabled its Grexit document over the weekend, the game was up. The euro has already been reduced to a transactional, fixed exchange bloc, subject to the whims of populist politics, shorn of idealism and solidarity.
Mr Schauble has been pushing for Grexit since 2012, and probably earlier. He genuinely thinks it would better for all concerned. When he floated his plan, he meant it.
But German Chancellor Angela Merkel did not mean it. She had the opposite purpose. There lies an enormous confusion.

Angela Merkel
She has stated repeatedly that any splintering of the euro would be the beginning of the end for the European Project. She has said this so many times that her own credibility is on the line.
Even if she was irritated by the Schauble paper – and her skirmishes with the irascible finance minister are legendary – she appears to have latched on to it as a useful negotiating ploy. The trick worked. It terrified Mr Tsipras into submission.
So we now have the worst of all worlds. The deal is an atrocity. The crisis has not been resolved. The integrity of EMU has been breached. Greece has been publicly crushed and humiliated, yet for no purpose. The country cannot possibly meet the demands. There is no debt relief (other than a vague and worthless promise for the future).
German diplomacy is in ruins. The world has reached the conclusion that Berlin broke ranks with fellow EU powers, and coldly threatened the ejection of an EMU member state. Great numbers of people across Europe think that Germany has pursued a narrow nationalist, agenda, and behaved like a bully.
Mr Schauble’s original and honourable intentions have been entirely misunderstood. The world’s verdict is that Germany's benign and enlightened statecraft in Europe over the past 60 years has given way to Bild Zeitung reflexes, the hegemony of crude populism.
One can only feel sympathy for German diplomats who must clean up the mess and explain how this tangle of conflicting agendas spun escaped control.
It is often said that the euro is talismanic for the Greeks: that it represents their admission as full and secure members of the European family, a political coin rather than a means of exchange.

If so, it is hard to see how long that can remain the case after what has just happened, for it is by now obvious to many that EMU is in fact the instrument and symbol of Greek national degradation.
Polls suggest that up to 80pc still want to stay in the euro. It is hard to know what weight to give these binary surveys since the 61pc landslide for "Oxi" and defiance in the referendum 10 days ago conveyed a different meaning.
Be that as it may, the Schauble plan is now on the table and everything has therefore changed. The Greek people are being offered a way out. Their illusions shattered, they might do well to approach the matter as a strict calculus of economic interest.
It is not an easy moral choice. The rich have already moved their money abroad. They would make a windfall gain from devaluation, just as the Mexican elites did after the Tequila crisis.
The rest of the country has stashed €40bn in secret hiding places, but most of their savings are still trapped in the banks. They would suffer a painful haircut under a switch to the drachma.
But at the end of the day, you cannot set economic policy in the interests of savers. That way lies perdition. What matters in the long run is whether the country can return to trade equilibrium, sustained growth and full employment.

^{Greek citizens have stashed €40bn in secret hiding places, but most of their savings are still trapped in the banks}
Given the vicious stupidity of the deal reached last weekend, there can no longer be the slightest doubt that Greece can achieve these objectives only by taking up Mr Schauble’s offer – now German policy by default, whether Chancellor Merkel likes it or not.
Those who argue that Greece was recovering last year and therefore can make it within a Teutonic euro are badly confused.
Yes, there can be short-term cyclical upswings even for peripheral EMU economies stuck in depression with an overvalued exchange rate. Spain is enjoying one right now.
But this is not recovery. The much-touted "internal devaluations" of these countries are deformed, and mostly a mirage. The underlying misalignment remains, certain to be exposed in the next global downturn.
Greece will continue to endure its long Calvary until somebody has the courage to tell the Greek people – and to keep telling them until the truth sinks in – that the drachma is their best hope of economic renewal.
All they are being told now is that any discussion of the drachma amounts to “treason”. If that is the level of intellectual debate, God help Greece.
Mr Tsipras missed his chance on Sunday. He - or his successor – will surely be given another before long.
European Economics Update Wolfson Update (Jun 15)

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Contributed by: Telegraph Graphics, The Telegraph

For those interested in the mechanics of Grexit, we attach an update of the Wolfson Prize material by Capital Economics.
The team was writing on the earlier assumption that Grexit might be chaotic and hostile. Mr Schauble’s velvet divorce removes that risk. One might almost think that his offer is irresistible.