Can Germany afford to let Greece leave?
The upcoming elections in Greece have gained added significance in recent weeks. Itâ€™s not just the Greek people choosing their next leader; it is also being presented as a referendum on euro membership. Either vote for a pro-bailout party and stay in the euro zone or vote anti-austerity and youâ€™re out. But is the outcome of the vote really that clear cut? Although three quarters of Greeks want to remain in the euro zone, 80 percent want the terms of their second bailout to be re-negotiated. The elections might not be such a foregone conclusion after all.
Itâ€™s worth looking at the two potential â€śchoicesâ€ť currently being presented to the Greek people. If they choose a â€śpro-bailoutâ€ť party that doesnâ€™t mean that champagne corks will be popped in Berlin. Those in power in Athens need to answer to the electorate who will have given them a mandate to challenge Germany and its insistence on tough fiscal reform in return for bailout cash. So if Europeâ€™s authorities think that the election of New Democracy (one of the parties who pledged to stick to fiscal reform post the election) is enough to keep Greece on the fiscal straight and narrow, think again.
But what if the Greeks vote for Syrizia, a radical left-wing anti-bailout party who came second in the first round of voting, then will the Med nation be kicked out once all of the votes are counted? It seems unlikely. If Greece leaves the euro zone it would inevitably be plunged into depression for years and, most importantly, for those looking on in Brussels, the very foundations on which the euro zone were founded upon would be shattered.
The euro zone was set up as a way to secure a lasting peace in the region after the horrors of the Second World War. The idea of an â€śeconomic communityâ€ť was to pool the resources of war such as coal, steel etc. so as never to experience another one. With Greece gone itâ€™s hard to see what the currency bloc represents, maybe austerity, but certainly not harmony. This would have various ramifications for the wider European community: 1, it would probably decimate the last of investorsâ€™ confidence in the currency bloc and could cause mass capital outflows from countries like Spain, Italy etc., potentially forcing them to require a bailout. 2, It would weaken Europeâ€™s power on the international stage. 3, it would be a PR nightmare. Greece, in its hour of need, and eighth consecutive quarters of negative growth, was ditched by a large, powerful, rich state like Germany. It doesnâ€™t say much for Berlinâ€™s staying power, which could hurt economic, business and political confidence in the region.
Reams of text and hours of news reports have told us how Greece would be thrown back into the economic dark ages if it leaves the currency bloc, but the more you analyse the current situation the more you realise that countries like Germany could have as much to lose as Greece if it were to leave or be thrown out. If problems spread to Spain (already Spanish bond yields are at fresh euro-era highs) German banks would be in trouble as they are exposed to Spanish lenders to the tune of nearly $150bn. Added to that, even in the midst of harsh fiscal austerity the Greeks spend more per capita on arms and weapons than other nations in the EU, which helped to boost the profits of Northern European arms manufacturers for years.
The Greek crisis is a real threat to exporters from Germany, and Euler Hermes, Germanyâ€™s biggest export insurer, said this week it is ending new business with Greece. This hurts companies at home, and adds a new political element to the crisis. But while German exports to Greece are fairly small, the real concern is for Spain, which is in the top ten of Germanyâ€™s export destinations.
If Germany et al wanted Greece out of the euro zone; I believe they would have ejected her already. After repeated rounds of bailouts, EU summits and pledges to keep Athens in the fold, why end it now? The euro zone is like a giant castle made out of jenga bricks â€“ by extracting a small one in the middle you threaten to bring down the entire structure.
Image — German Chancellor Angela Merkel looks at her wristwatch as she waits for her guests during the arrival for the “Council of the Baltic Sea States” leader summit in Stralsund, May 30, 2012. REUTERS/Fabian Bimmer