Although financier George Soros has said that he puts the prospects of a Grexit at 50/50, he appears to be in the minority. Syriza’s defiant and increasingly embattled leader, Alexis Tsipras, appears to believe that it will be possible to pull off the three-card trick of keeping Greece in the euro, giving the finger to the austerity programme demanded by the country’s creditors, and clinging to political power. Vanishingly few economists share his optimism, with Morgan Stanley — for one — recently describing the challenge facing Syriza as an impossible trinity.
Investors seem more sanguine than Soros, says Platon Monokrousos, chief market economist at Eurobank in Athens. He was visiting investors in London in March, and reports that the prevailing view among UK-based institutions is that a Grexit will be avoided.
That is good news, because as Greek economists say, the impact of an exit would be apocalyptic for Greece. They argue that those who believe that a return to the drachma would magic away Greece’s debt and bring back the good old days of competitive devaluations are dangerously deluded. The reality, they say, would be a collapsed banking system, a feeble currency unable to pay for imported food and pharmaceuticals, and a society dependent on aid from the EU and elsewhere. In short, an exit would herald a humanitarian crisis that would make what Greece is suffering today look trivial by comparison.
But a Greek exit from the euro would not just be a disaster for Greece itself. It would also have damaging consequences for Germany. After all, it would be eurozone-based taxpayers — led, as ever, by those in Germany — who would be called upon to foot the aid bill necessary to prevent widespread hunger and disease in Greece.
There is also a school of thought that a Grexit, perhaps paradoxically, would strengthen the euro by removing one of the most threatening clouds that has been hanging over the single European currency. That would be bad news for German exporters — but probably only in the short term. “The euro would benefit because without Greece, the currency union would be less heterogeneous,” says Commerzbank’s Frankfurt-based chief economist, Jörg Krämer. “But the case for a weaker euro would still be in tact over the medium and long term because the pressure would still be on the ECB to complete its QE programme. So a Grexit would not be a game-changer for the euro.”
More broadly, however, economists agree that the last thing Germany needs is any geopolitical setback that increases the chances of the euro project’s demise. Leaving aside concerns over Greece, mistrust of the single European currency is growing virtually everywhere else in the EU. By extension, there is also rising hostility towards its prime economic beneficiary, which is clearly Germany.
As Spiegel said in a recent brutally frank examination of how the rest of Europe sees Germany, “the euro was supposed to break Germany’s economic dominance, but it has had the opposite effect. The shared currency has bound together the fates of euro-zone member states and granted Germany power over the others.”
Little wonder that Pablo Iglesias, leader of Spain’s far left Podemos Party has accused Angela Merkel of “dogmatic arrogance”. Given that his anti-austerity party has been winning more than a quarter of the vote in recent opinion polls, Iglesias cannot simply be ignored when he says that he refused to allow Spain to become an economic colony of Germany. Nor can France’s fiery Marine Le Pen, who has promised to hold a referendum on a Frexit if she becomes the republic’s 25th President in 2017, as some polls have suggested she may. In a Spiegel interview, the leader of France’s Front National (FN) has described the EU as “deeply harmful” and “an anti-democratic monster”. She has also said that the single European currency was created “by Germany, for Germany”.
That belief is likely to have been strengthened, rather than weakened, by the ECB’s QE package. “Ironically, the ECB’s stimulus seems to be benefiting Germany more than any other eurozone country, which was not the original intention,” says Krämer, who adds that he is concerned about rising tensions within the eurozone.
It is Marine Le Pen’s Germanophobic rhetoric, rather than the nonsense coming out of Athens about war reparations or the confiscation of the local Goethe Institute, that should be sending shivers down the spines of those who worry about Europe’s economic future. “Everybody is talking about the situation in Greece, but the real problem for Europe may be what is happening in Italy and France,” says Krämer.
For the time being, he adds, the political climate in Europe appears to be increasingly resistant to closer economic integration and the push towards fiscal union. “The economic situation today suggests we need more rather than less Europe,” he says. “But voters in most countries are very unlikely to allow their politicians to do this. It is becoming clear that the overstretched euro has pushed Europeans further apart instead of bringing them closer together, as was the initial intention of the fathers of the euro, François Mitterand and Helmut Kohl.”
Not so far apart, yet, that the majority want to see the back of the euro. According to the latest Eurobarometer survey, 68% of French voters still support the single currency, compared with 75% in Germany. There is less support in Spain (60%) or Italy (54%), but across the eurozone, the euro still has majority support.
That is just as well for Germany, where the economic impact of a dismantling of the euro would be profound. Local economists are uneasy about commenting on the prospects for a breakdown in the European single currency project, which they say is increasingly a political rather than an economic issue. But they are under no illusion about the probable repercussions for Germany. “There would be a very sharp revaluation of the German currency, which would have a very negative impact on business competitiveness and lead to a deep recession in Germany,” says one.
Some say this may be an exaggeration, given how efficiently Germany learned to live with the strong Deutschmark. All the same, there are increasingly vocal calls for Germany to adopt a more conciliatory tone towards the rest of the eurozone, and to do more to ensure that the economic benefits of monetary union are divvied out more equitably across the EU.
That does not necessarily mean going soft on Greece’s debt nor on its defiance towards much-needed reform. Nor can it mean adopting a monetary policy that would be more appropriate for a fast-growing economy like Germany but ruinous for those still mired in recession and unemployment. “If European monetary policy were based purely on the German cycle we would probably be happy to have interest rates of 2% or even 3% and above,” says Frank Scheidig, global head of capital markets at DZ Bank in Frankfurt. “But that is clearly not possible in the current set-up.”
A good European
Instead, say some economists, being a good European has to mean encouraging more domestic investment and grasping the nettle of Germany’s large and widening current account surplus, which reached 7.5% of GDP in 2014. This surplus is well above the 6% threshold recommended by the European Commission (EC) and has been the object of repeated criticism from international observers ranging from the IMF to the World Bank.
Local economists say that it is inaccurate to attribute Germany’s ballooning current account surplus to trade imbalances with Europe. “I understand the point that is frequently made about Germany’s high surpluses, but net trade with the eurozone peaked in 2008,” says Stefan Schilbe, chief economist for Germany at HSBC in Düsseldorf. “It is Germany’s trade with the rest of the world, which is generally much less price sensitive, that has underpinned the surplus in recent years.”
Nevertheless the European Commission has pulled no punches on the subject of the current account surplus. In February, it stepped up its imbalances procedure for Germany, saying that “risks have increased in light of the persistence of insufficient private and public investment, which represent a drag on growth and contributes to the very high current account surplus.” The EC added that “the need for action so as to reduce the risk of adverse spillovers to the economic and monetary union, is particularly important.”
The OECD, for its part, has repeatedly urged Germany to increase government spending as a way of diversifying its economy. It has recently argued that growth-enhancing expenditure on childcare facilities, education and infrastructure would — by increasing imports — “provide positive spillovers for the euro area.”
Would it? Whether using public sector investment to bolster domestic demand is an appropriate nostrum to address potentially destabilising inequalities across the eurozone is a subject of animated debate.
Standard & Poor’s (S&P), for one, has looked into this, and come away unconvinced. In a recent analysis, the ratings agency examined the likely impact on the rest of eurozone of an increase in German public spending equal to 1% of GDP in 2015 and 2016. Assuming monetary policy remained accommodative throughout this period, the S&P analysis concluded that a stimulus package of this magnitude would lift the eurozone’s real GDP by 0.3% and create 210,000 additional jobs.
The drawback, according to S&P, is that this would risk overheating the German economy, with the inflation rate reaching well above 2% by the end of 2017, a development which, says S&P, would “certainly cause alarm in the country”.