It's my party .....

The Greeks must feel like they have accepted an invitation to a party that nobody wanted them to turn up to.    They have spent a long time getting ready and even brought a bottle of their favourite wine with them, but the host has turned his nose up at the wine (well Retsina is perfect while on holiday on the Aegean but loses its appeal in cooler northern climes) and explains that it’s not a fancy dress party afterall!  Oops!  Nobody is quite sure how to fill the awkward silence that follows.

A year ago it was not an option that Greece should leave the Euro.  The political leaders of the Eurozone

then as now said that they wanted Greece in and would do what was needed to achieve that.    There was a major agreement to that effect in July but since then little real progress to solving the crisis. 

There were many reasons for the agreement in July.  There was the need to avoid the potential for financial contagion – a series of events that would see any Greek default bring down some other european banks – mainly French and German – and in turn see a further bank collapses like a row of dominoes.  In similar vein, a default would have sent market confidence reeling making an attack on Italy, Spain and Portugal inevitable.  Grim.  As well, the EU is proud of its existence and its members are committed to its success – albeit some more than others.  Finally, there is the matter of there being no mechanism for a country to exit the euro and certainly no means by which the members can force another out. 

Nine months on and some things have changed.  The big change is that the banks are less exposed to a Greek default.  What has not changed enough is that the rest of the ‘PIGS” are much more solvent than before but are still vulnerable to a bond market attack.  We are consequently closer to a position where Greece could exit the euro with limited impact on the rest of the currency zone. But not there yet.  That requires more stringent control of the deficits of the eurozone economies and signs of growth.  Without the latter, no amount of lower deficit plans and new governance procedures to ensure that the plans are met will convince the markets of the sustainability of eurozone debt levels.

Whether intentional or not, the political prevarication of the last nine months has focused everyone’s attention very precisely on the core of the problem: the need for Greece – its population – to undergo a huge adjustment process.  It is a degree of austerity that makes the UK deficit plan look like a Christmas and New Year party rolled into one.  It is not about will the Eurozone bail out Greece, but whether Greece can withstand the changes needed to stay.  It is not an unthinkable option that Greece should leave the euro, but a cost/benefit calculation of which is most effective: to support their continued presence in the euro or to clear up the mess if they leave.

I really do not think that the party invitation last July was not intended or well meant.  I do know though that the Greeks are now very aware of the high cost of accepting that invite and that it is down to them to decide to stay rather than up to anyone else to force them out.