It’s one minute to midnight for the euro. The standoff between Greece and its creditors, led by Germany, looks increasingly like it could lead to the first nation exiting the common currency. The new Greek government’s suspension of state-asset sales and plans to rehire government workers and increase wages hasn’t helped negotiations. But it’s German intransigence that’s forcing Greece into a financial corner from which the only escape may be Grexit.
Why is German Chancellor Angela Merkel being so relentlessly uncompromising? Here are three possible explanations.
1) Germany sees the “Grexit” as not just survivable, but desirable.
At the beginning of the year, Germany’s Spiegel magazine ran an incendiary article saying Merkel’s government had decided a Greek departure from the euro zone could happening without damaging the broader currency project. “Grexit Grumblings: Germany Open to Possible Greek Euro Zone Exit,” said the headline. Re-reading with the benefit of hindsight, the article actually went further than that. The key passage is here:
“Officials in Berlin and Brussels no longer subscribe to the so-called domino theory,' which held that a Greek collapse would be followed by others. It has been replaced by the `chain theory,' which holds that the entire chain would become stronger were its weakest link to be eliminated.”
Even as the discussions between Greece and its creditors have become increasingly deadlocked, there’s almost zero evidence of contagion. Portugal, typically viewed as the second- weakest euro member, is enjoying 10-year borrowing costs today that are only a whisker away from the record lows of a few weeks ago.
Here’s a thought experiment: the morning after the reintroduction of the drachma, would the euro be stronger or weaker based on its trading levels in the foreign exchange market? A couple of months ago, I would have argued that Grexit would be disastrous for the health of the euro project. Now, I’m not so sure.
The euro is up half a percent against the dollar Monday, even after talks between Greece and the euro region’s finance ministers broke down Monday night. That could be because investors expect a compromise. But it could also be that they’ve stopped caring whether Greece is in or out.
2) Germany would sacrifice Greece to keep everyone else in line.
Germany has been steadfast in its demands for fiscal discipline from its neighbors and its insistence on economic austerity. Others aren’t so keen. France has been whispering ever louder about the need to boost growth, while in Spain, the anti-austerity Podemos party leads Spanish opinion polls, with an election due by the end of the year. Ceding ground to Greece to keep it in the euro might encourage other countries to strengthen their demands for more spending and fewer budget cuts. Again, the Jan. 5 Spiegel article seems prescient:
“Berlin officials fear that giving in to a new, leftist government in Athens would further call into question controversial austerity and reform policies – an eventuality that would be welcome in France and Italy, countries where reform has not been welcomed with open arms.”
In the immediate aftermath of the Greek election on Jan. 25, France seemed to be making conciliatory noises about reaching a compromise to keep Greece’s life-support funding switched on. Monday, though, Finance Minister Michel Sapin stuck to Europe’s official position that extending Greece’s rescue program is the only way forward. By holding the line on austerity, Germany seems to have corralled its European Union peers back onto the path of Teutonic economic righteousness.
3) Germany isn’t interested in game theory.
Much has been made of the game-theory background of Greek Finance Minister Yanis Varoufakis and how it might help Athens achieve a compromise. But people are less rational and logical in real-life negotiations than in theoritcal ones. As my colleague Justin Fox put it earlier this month:
“Greece’s negotiations so far with the EU, though, have repeatedly resulted in outcomes that leave both sides worse off. They have gotten stuck in a prisoner’s dilemma – which seems all the more reason to try to shake up the negotiations.”
In the Greek negotiations, two implacably opposed ideologies are butting heads, the seemingly unstoppable force of Greece’s democratic mandate meeting the immovable object of German economic philosophy. In his novel “Walking on Glass”, Iain Banks suggested the only outcome in such a collision is that “the unstoppable force stops, the immovable object moves.”
Right now, that’s not happening. Commerzbank now puts the chances of Grexit at 50 percent, double what it was predicting last week. A one euro bet on Grexit with the bookmaking company Paddy Power will net you a profit of less than 38 cents; last month, you’d have made 3 euros. We may be on the verge of finding out whether a Greek exit from the euro is a self- contained explosion, or an existential threat to the single currency. Here’s hoping the optimists are proved right.
Mark Gilbert is a Bloomberg View columnist and a member of the Bloomberg View editorial board.