The Eurozone isn’t on the verge of collapse, yet.
FROM POLITICO | JULY 5, 2015
If Eurozone unravels over the coming weeks, it will be because of stupidity and panic, not because of Greece. There is absolutely no reason for the entire Eurozone to collapse due to Greece, and no reason to assume that it will or even come close.
A considerable majority of Greeks voted on Sunday to reject the onerous bailout conditions demanded by European creditors. More than 60 percent of those who went to the polls followed the call of Prime Minister Alexis Tspiras to stand up against years of punishing austerity. There were celebrations in the streets of Athens and promises by the Greek government that the result would strengthen the Greek position and force concessions from the Germans, the European Central Bank and the rest of the Eurozone.
If only the referendum marked the end of six agonizing years where Greece has been the symbol for the Eurozone and its future. If only the vote resolved the question of whether Greece is the proverbial first domino or instead a wounded limb that can be removed without killing the main body. If only the action of financial markets on Monday and throughout the upcoming week provided a clear signal about whether the other struggling members of the Eurozone, especially Italy and Spain, have recovered enough from the worst of the financial crisis to withstand the efforts of bond market speculators to send their sovereign yields soaring again to dangerous levels.
The immediate reactions on Sunday were, to put it blandly, mixed. Some members of the European Parliament and the German government said that there was no other path now than a “Grexit” from the euro. The German economy minister and head of the Social Democrats remarked, “Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness,” and concluded that there was little way for Greece to remain in the euro. On the flip side, the normally hawkish and hardline German Finance Minister Wolfgang Schaeuble said that the member states of the Eurozone would not “leave Greece in the lurch,” though it isn’t clear what that actually means. German Chancellor Angela Merkel and French president Francois Hollande announced they would meet on Monday to discuss how best to respond.
Financial markets will have the first say, however, and that say is likely to be a resounding “OMG” combined with considerable volatility. Some of that will come from traders who have had a blah year looking to make very fast money. Some will come from fund managers who have been betting against the euro and skeptical of the debt of countries such as Spain and Greece. And some will simply be skittish investors whose nerves remain frazzled even six years after the financial crisis and primed to see any tremors not as normal features of the world we live in but as preludes to the Big One that will leave portfolios in tatters, companies in confusion and sovereign government finances in shambles.
Voices warning of the Big One will likely be the same voices that always warn of the Big One. In an infinitesimally small number of situations, those voices are right; the rest of the time they are very wrong. Heeding them is almost always a recipe for making spectacularly wrong decisions, except for once in a generation. This might be that one time, but I doubt it.
Does the situation in Greece really imperil the $17 trillion U.S. economy? Does it impact how 3 billion people in India and China will shape the next five or ten years, as hundreds of millions continue to lurch into the middle class? Does it impact how hundreds of millions of Africans stretching from Nigeria to Kenya manage their own economic moves into the future? No, no and no.
The Greek vote is important for the economic future of Greece. And it may damage the economies of Greece’s European neighbors. But Greece is an economic minnow that becomes larger only due to symbolism and collective bad decisions in the Eurozone.
The only financial signal that will matter in the coming weeks is the price of sovereign debt for Italy and Spain. If yields on the trillions in outstanding debt of these countries—vastly more than Greece’s several hundred billion in debt—begin to climb high and fast, say over 3.5 percent in the next two weeks compared to the current level of just over 2 percent, then that might, might be sign that fears about what Greece symbolizes are valid. Such a move could represent a much deeper lack of confidence in the future of the unified Euro currency, which in turn would have unsettling implications for the price of most financial assets worldwide, including of U.S. bonds and equities.
Even that move, however, could be a function more of bond “vigilantes” taking advantage of the limited number of buyers and sellers to move prices quickly for short-term financial gain. That is precisely what happened in 2009, and again in 2011. And Spain and Italy are better prepared to weather spiking yields this time than they were during previous scares.
The difference now is the European Central Bank under the aegis of Mario Draghi is actively engaged in an aggressive program of bond buying meant to support the euro and provide ample liquidity for sovereign debt. The upshot of these measures is to support the bonds of countries such as Spain and Italy to a degree unimaginable the last time they came under pressure. Add to the mix the fact that both economies, while hardly thriving, are not at all in crisis mode and you have a very different backdrop than was the case when the yields of those countries last spiked, causing global fears about the future not just of the euro but of the entire global financial system.
The unknowns about what happens next remain the biggest challenge. We could plausibly see a sudden deal, or sharp moves by the Greek government that will hasten a departure from the euro. Market players hate this uncertainty, endemic though it is to the human condition. Not being able to gauge outcomes throws into chaos the neat efforts to establish prices. The political class that has to assemble in Europe and decide what to do about Greece is not much better with uncertainty, looking always for the perfect historical analogy that will offer the best guide to the present. Hence the constant invocation of Munich 1938 when it comes to appeasing or not aggression, and hence the search for what moment in the crisis-laden 1920s and 1930s the present best resembles.
The most important unknown is just how strong the buffers put in place are. It is easy to say, as many have, that Greece can be allowed to depart the Eurozone with minimal negative effects, that the past three years have seen a quarantine of Greek debt and its contagion effects. Until those financial levees are tested, however, we take on faith that they will hold. There are no real life test runs.
One thing is now certain: you cannot ask 11 million people to endorse the prospect of economic pain without foreseeable end. It doesn’t matter that the Greek political and economic system have been hopelessly corrupt for decades and that the Greek people are bearing the brunt of that. In democratic societies, people will rebel after five years of dramatic decline and no formula for the future that offers anything but more of the same.
There is plenty of fault and blame to be assigned, ranging from the rigidity of Greece’s creditors to the structural corruption of Greek politics and finances. Millions of Greek people have suffered as fingers pointed; they have now spoken and demanded that their needs matter.
Until the members of the Eurozone perceive that the problems of one member are a problem for all members, the euro experiment will remain tenuous at best.