Matthew Lynn’s London Eye Commentary: Marshall Plan–style aid would give Athens time May 16, 2012|
This update corrects the size of the proposed “Marshall Plan” to 23 billion euros.
LONDON (MarketWatch) — It doesn’t take long for an idea to become an accepted fact in the markets. Six months ago, Greece’s leaving the euro was seen as so unlikely that nobody had to think seriously about. Now the “Grexit” — as a Greek exit from the euro zone has been dubbed — is increasingly seen as a done deal. Citibank rates the chances as high as 75% that Greece will leave the single currency in the next 18 months. The British bookmaker William Hill regards it as such as done deal it is no longer taking bets. It’s not hard to understand why: The Greeks won’t accept austerity anymore, and the Germans won’t give them any more money if they don’t take the harsh medicine that is being prescribed. Game over. The exit signs are flashing red. There’s just one snag with that analysis. It isn’t going to happen. Germany will realize the risks involved, eat its words and come up with a mega-bailout. Instead of a “Grexit” we’ll see a “Grashall Plan” — as a Marshall Plan for Greece may quickly be dubbed — to reflate its economy and keep the euro staggering on for a couple more years, at least. There’s no mystery about why the markets have suddenly woken up to the possibility that Greece’s quitting the single currency is suddenly a very real possibility. The Greek election decisively rejected the austerity plan imposed by the European Union and the International Monetary Fund. Unless it sticks to the plan, no more bailout money is forthcoming. And the country is broke. Its budget deficit is still vast, and it has no way of raising money on the capital markets by itself. The cash to pay its bondholders isn’t going to be there. The police and soldiers and public servants are not going to get their wages. Without the next slug of bailout money, Greece is going to quite literally shut down. With little sign of a new government being formed, there is now the prospect of another election next month. But there is very little evidence it will produce a different result. The Greeks voted against austerity in May, and will probably do so again in June. Nothing much has happened to change their minds. A fresh election might well result in an even more decisive anti-austerity majority. Meanwhile, German officials have started saying that the groundwork has been done, and that a “Grexit” is now a manageable event. The German newspapers are suddenly full of briefings from senior government officials saying everything is under control. Sure, they don’t want the Greeks to leave the euro, and no one is forcing them out. But if it happens, it happens. Maybe there will be some chaos in the markets. But there is a plan in place to make sure the country is ushered out smoothly — and the euro emerges otherwise intact. It all adds up to making the “Grexit” look like a done deal.
But it isn’t. The Germans are talking tough. When it comes to the crunch, however, they will blink, and deliver a Marshall Plan–style package to keep Greece in the euro.
A “Grexit” is a very high-risk strategy.
There is absolutely no way of knowing whether contagion to other countries can be contained. True, you can build firewalls around the banks, and try to make sure that any losses on the bonds are not catastrophic for the financial system. You can boost the stability facility, and make sure that the IMF is on standby to hose down any blazes that do break out. You can line up a few emergency summits to solemnly declare that even though the Greeks might be out, there is no way the Portuguese or the Irish are going to follow them, and certainly not the Italians or the Spanish.
The trouble is, you can’t really know how it will play out. No one has tried breaking up a shared currency before. Money may start to flee out of every country at risk of coming out of the euro. Fiats may start loading up with bank notes and driving across the border to deposit Italian euros in German banks, and Seats with Spanish euros to go into French banks. It won’t make much sense to keep any cash in a country at risk. A full-scale bank run could easily get out of control, and blow up the best-laid plans in mere hours.
Next, the Greek economy may collapse completely, and society with it. A hastily re-introduced drachma will be worth nothing. Greece may not be able to pay for petrol for police cars or medicines for the hospitals. Law and order could break down. Floods of refugees may start to stream across the borders. No one has any real idea what will happen, but it could be very bad. And worst of all, the EU, and Germany in particular, will get the blame for it.
There is, of course, an alternative. The Greeks can’t carry on with the austerity being imposed on them. No country can be expected to endure annualized falls in GDP of 7% or more and 50% youth unemployment for years on end. It simply isn’t acceptable.
But Germany and the rest of the EU could come up with a Marshall Plan–style package for Greece. Very little of the bailout money so far has gone to the Greeks. It has all gone to the bankers. A €23 billion package (the equivalent of 10% of Greece’s shrunken GDP) to reflate the economy would buy Greece some time.
It might not work in the medium term; in fact, it will make things worse. But in a crisis, politicians work on very short time scales. What’s better: The risk of a full-scale catastrophe or a €23 billion bailout package that buys you breathing space?
Forget talk of a ”Grexit.? There will be a mega-bailout — a “Grashall Plan” — instead. And when it happens, the markets will rally on the news.