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Greece will Eventually be Forced to Leave EMU, but the Timing is Still far From Clear

Posted: 11/07/11 22:53

The endgame for Greece's relationship with the economic and monetary union may still be some time off, but the contours of the final act of the drama are starting to emerge. It seems fairly likely that Greece eventually will be forced to leave EMU, but the timing is still far from clear. Three guiding precepts stand out.

First, the Germans will not pull the plug on Greece -- at least, not overtly. History rules this out. Germany has no wish to return to the psychology of the Second World War. If Greece decides to leave EMU, this will be because of a sovereign decision of the Greek government, the Greek Parliament and the Greek people, based on an interpretation of the country's national interest.
Second, whatever the Germans do, they will not act by themselves. In any new currency arrangement in Europe, the Germans will not be left high and dry, but will ensure that they are surrounded by a reliable set of cohesive partners with which they carry out a large share of their trade.

This is another lesson of history. Germany has learned that it is never more vulnerable than when it is alone.

The last time the Germans came close to isolation in monetary affairs was in 1993 when French Prime Minister Edouard Balladur tried to eject them from the exchange rate mechanism, the forerunner of EMU. They ploy failed since Wim Duisenberg, president of the Netherlands national bank, said that if the Germans left, the Dutch would leave too -- a gesture for which he gained the Bundesbank's unending gratitude.

Third, similar considerations apply to the Greeks. If they eventually decide to depart from the euro, they will not be left swinging in the wind. They will given help aplenty to weather the transition. Just as the Germans have no interest in being labeled the sole villains of the piece, and will attempt to make alliances with others, no one has any interest in seeing the Greeks left alone as martyrs -- even if that is a Greek word.

Latest events exemplify how these factors are coalescing. The spat between the European Central Bank and the German government on whether "forced" restructuring should form part of the next Greek aid package is part of a blame game.

All parties in the drama are seeking to offload responsibility for any mishap on to others.
The ECB suspected it was being set up as the "fall guy," the natural target of general opprobrium over the potential dismantling of the euro. Hence the hardening of the ECB's stance aimed at shifting the onus for action back to the politicians.

Chancellor Angela Merkel's apparent climb-down, indicating that private-sector participation in the next Greek aid package will be "voluntary," signals how the German government cannot afford the risk of being blamed for Greece's eventual departure from the euro. And the apparent unity with France demonstrates Germany's fear of being left by itself. So the stage now has shifted to further players in the theatre of Greek affairs.

First, German parliamentarians who voted solidly in June to involve private-sector creditors in the next bail-out package. Second, Greece's politicians and people, who must bow to further austerity as the price for fresh external support. Nobody knows whether the burly new Finance Minister Evangelos Venizelos will put in a starring role or turn out merely as a transitory figure. Third, the banks and bond-holders who are willing to carry out a limited "voluntary" restructuring of Greek debts - but not one that would be large enough to really make any difference to lowering the terrifying level of overall borrowing by the problematic fringe states of the Euro area.

Very likely all partners in the Euro experiment have purchased extra time for what will turn out ultimately to be a heroic but fruitless exercise. The denouement though is still some time away.