Written by Paul
Krugman
Economist, NY Times
Markets are panicking.
It’s important to understand that this is not a verdict on the New Greek
government, or at any rate only the New Greek government; it’s a judgment that
the risk of no agreement, and a disorderly breakdown of the whole process, is
high.
1. We are not talking
about whether Greece will pay its debt. As I tried to explain the other day,
the headline Greek debt number is more or less meaningless. The question is how
much Greece will transfer to its creditors by running primary surpluses - and
yes, at this point that’s the question, there’s no possibility that the
creditors will transfer more resources to Greece.
2. If Greece were to
adhere totally to the previous terms, over the next five years it would make
resource transfers of about 20 percent of one year’s GDP. From the point of
view of the creditors, that’s a trivial sum. From the point of the Greeks,
however, it’s crucial; the difference between a primary surplus of 4.5 percent
of GDP and, say, 1.5 percent of GDP for the Greek economy and the welfare of
its citizens is huge. The only reason for the creditors to play hardball would
be to make Greece an example, to discourage other debtors from trying to
negotiate relief.
3. If the creditors do
play hardball, their leverage does not come from the ability to refuse new
loans to the Greek government. With Greece running a primary surplus, all new
loans - and then some - are going to pay principal and interest on old loans,
with less than nothing going to the Greeks. There was modest de facto aid to
Greece in 2010-2012, but no aid is currently flowing, nor will it.
4. Instead, the power
of the creditors over Greece comes via the ability to crash the Greek banking
system, which is heavily dependent on the ability to borrow at need from the
ECB. Cut off that support, and Greece suffers banking collapse. So yes, the
creditors have a large club they can use on a recalcitrant Greece. But do they
really want to do that? Within a European Union supposedly dedicated to
democratic ideals? Actually, you have to wonder whether the ECB, which surely
understands the stakes, would even be willing to go along. If the situation
continues to look like unraveling, I would expect Draghi to say something to
reassure the markets that a Greek bank cutoff is not on the table.
5. Ideals aside, the
consequences of playing hardball with Greece over its banks could very easily
be immense. Up until now, the euro has proved very durable, largely thanks to
the point Barry Eichengreen emphasized: any country that even hinted at the
possibility of leaving would face the mother of all bank runs. But as I worried
some time ago, this argument becomes moot if the banking system has already
collapsed. Grexit - the often speculated about, never so far materializing
Greek exit from the euro - becomes a very real possibility if European
creditors try to exert leverage by taking away the safety net for Greek banks.
6. And if Greece
really does leave the euro - if it turns out that the single currency is not
irreversible - do you really think there would be no contagion? Want to bet on
it?
7. In particular,
think about what happens if Greece leaves the euro and then manages to find its
footing - which it probably would after a chaotic year or two. The EU could
prevent that by deliberately undermining the post-euro Greek economy. But that
would be a betrayal of European principles.
8. At the moment,
Germany is talking as if it intends to follow the Michael Corleone strategy.
But do we really think that Syriza will or even can retreat with its tail
between its legs immediately after winning a dramatic election victory? Again, wanna bet
on it?
Daniel Davies tells us
that “European policy makers aren’t stupid.” But they do say stupid things,
still talking about expansionary austerity, still treating debt as a purely
moral issue. Can and will they be realistic, accept that they can’t extract
blood from a stone - at any rate not at the rate of 4.5 percent of GDP - in
time to avert a spiral into disaster?
(Πηγή: New York Times)
