Monday 14 October 2019

Eurozone firewalls held up well - but they could face real test next week

German Chancellor Angela Merkel attends a debate on the Greek financial crisis at the German parliament in Berlin yesterday. Photo: Markus Schreiber/AP
German Chancellor Angela Merkel attends a debate on the Greek financial crisis at the German parliament in Berlin yesterday. Photo: Markus Schreiber/AP
Dan O'Brien

Dan O'Brien

One country. Five-and-a-half years. Hundreds of meetings. Countless hours of prime ministerial time, energy and attention.

The amount of effort that has gone into Greece since early 2010 says many things, but above all it shows just how strong the will is to avoid any break-up of the eurozone.

Despite all the talk of end games and crunch moments, the Greek crisis may have a long time yet to run.

As this column concluded last week, the least bad possible outcome is that there will be many more years of Greece being a special case in the eurozone, as it is nursed, cajoled and - yes - sometimes bullied into doing what the majority view among other countries believes to be in the best interests of all concerned. It is to be hoped - in the interests of everyone, from Dublin to Athens and Lisbon to Tallinn - that the currency union holds together.

Cutting a country as deeply problematic as Greece out of the euro may have its attractions in terms of ending the seemingly endless crisis. But the short, medium and long term consequences of even one country departing the supposedly permanent currency union are many and great.

If the Greek people reject their government's position in Sunday's referendum, then there will be hope of holding the euro together as it is currently constituted.

But if the government wins majority support in a vote that other European leaders have said is about staying in the euro, then it is all but inevitable that Greece will exit the single currency. Grexit could take place as early as next week.

Having been put on the spot to make a prediction first thing on Monday morning on RTÉ's 'Morning Ireland', I said that my hunch was that the Greek people would vote against their government and for the European plan (officially the plan has been taken off the table, but in reality it is still very much in play).

Although events have been evolving almost by the hour since, I believe even more strongly now that the referendum (if it takes place) will result in defeat for the government, that the prime minister Alexis Tsipras will then stand down and that a new interim government of national unity/salvation will be formed.

If that does not happen, it is hard to see anything other than a complete shutdown of the banking system, an exit from the euro, a new currency being introduced and all of this accompanied by a huge further contraction of the economy. Tsipras will at least have a double mandate - his January election victory and the referendum - to oversee this chaos and further immiseraton of his people.

That may make the politics of jumping off the cliff slightly easier, but in six months' time when thousands more businesses have closed and unemployment is heading towards 40pc, I doubt it will matter much. In short, a vote for the government on Sunday is little short of a vote for national suicide.

But what of the more benign scenario of a national unity/salvation government accepting the current offer?

In that case, the European Central Bank would quickly turn back on the tap to Greek banks, allowing them to open early next week. It is imperative that that happens as quickly as possible.

This week's closure of the banks amounted to a heart attack for the economy. It guarantees that the already broken recovery which took hold last year will be turned back into a recession.

One reason is the effect on spending. As people have less access to cash, and hoard what they have out of fear, consumer spending will have tanked this week. More damaging over the longer term will be the impact on businesses. At any given time in any economy, companies are at different stages of their life cycle. Inevitably, in times of brutal trading conditions, many are just hanging on.

A shock of the kind suffered this week, when turnover falls drastically and the payments system seizes up, will push more businesses over the edge. Greece already has a weak private sector. Killing off more businesses is the very last thing is needs now.

If the banks can re-open early next week and a new government offers greater certainty that Grexit will not happen, there is some hope that the damage caused to the economy by the current government can be limited.

Although the hole out of which Greece has to climb has been made a lot deeper, at least people will have seen that there is no easy and simple way to get to better times, as they were led to believe by the fighting talk and false promises pedalled by Syriza.

The past week has been a disaster for Greece and for Europe. If there was anything that appears a little less negative now than seven days ago, it is that there is more reason to be hopeful that the consequences of a Grexit, if it does indeed occur, can be contained.

Because the announcement of the referendum came late last Friday night, financial markets were closed and therefore couldn't react. As the huge implications of holding a de facto in/out vote became clear over the weekend, it was inevitable that financial markets would react badly from the very moment trading opened on Monday.

And that is exactly what happened.

The euro fell vis a vis other currencies. Stock markets fell. And, most important of all in terms of Europe's financial stability, investors sold off the government bonds of weaker peripheral countries.

But the good news was that the falls were not enormous, much of the declines were reversed in subsequent days and, mercifully, an outright panic wasn't triggered.

None of this means that the financial market herd will not stampede blindly if Grexit happens, but there is a more reason to think Greece has been fire-walled.

Sunday will likely tell whether the firewalls will really be tested.

Irish Independent

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