WHO will blink first? The Greeks – or the Eurozone? Both have lots to lose from a Greek collapse and withdrawal from the euro; and Georgios Papandreou’s decision to bet everything on a referendum on the bailout package has massively upped the stakes. Until yesterday, it seemed as if Nicolas Sarkozy and Angela Merkel would huff and puff but never actually deliver on their threats to cut off the cash, preferring instead the cowardly way out. After all, quietly agreeing to ever more handouts – even when Greece failed time and again to deliver on its promises and austerity package – has been the Eurozone’s strategy all along.
Since last night’s press conference, however, I am no longer so sure. They may still be bluffing, but the French and Germans appear for the first time to be contemplating the possibility that the point of no return has been reached, that Greece may be finished and that the only way to save the entire EU political project will be to cut Greece loose. The establishment still hopes Greece could be persuaded to vote yes, thus keeping the birthplace of Western civilisation within the euro-empire, but the psychology has changed drastically. The Greeks could vote No in December – especially given that Papandreou wants the referendum to address austerity, not euro membership, which remains popular in Greece. If that happens, the only way for the bailout plan announced with such fanfare last week to retain any credibility would be for Greece no longer to be included.
Many in Brussels are livid at Papandreou’s decision to ask the people what they think, always a no-no to undemocratic elites. But European taxpayers are also rightly angry; as far as they are concerned, beggars cannot be choosers and Greece should either do what it is told or be thrown out. The arrogance of those who believe that they are entitled to live beyond their means forever, courtesy of taxpayers in harder-working, less corrupt economies, is indeed extraordinarily galling. The Germans and many others would undoubtedly vote to throw Greece out of the EU if they were given the choice in a referendum.
The Eurozone’s main aim now will be to contain the fallout from any Greek default and withdrawal from the euro. The value of Greek assets (land, equity and debt) redenominated in a new drachma would slump 70-80 per cent. Combined with inevitable capital controls, social collapse and mass nationalisation, the chaos would inflict huge losses on all companies with operations in the country. The European Central Bank itself may become insolvent as its Greek government bonds would become near-worthless. It too may require recapitalisation. Yet it would undoubtedly provide liquidity to those hit by the write-offs; the printing presses would go into over-drive.
To backstop other countries, especially Spain and Italy, Merkel and Sarkozy now want to accelerate the leveraging up of their bailout fund – but with the Chinese getting cold feet and the news yesterday that the fund’s latest bond auction had been postponed, prospects are poor. So what next? The EU is terrified investors will now start to question Italian, Irish and Portuguese bonds. If one country defaults and quits the euro, why not more? Should Ireland’s and Portugal’s debt be restructured too? Will the Eurozone unravel next year? Anything is now possible.
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