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A Greek exit would trigger a hit to confidence in other sovereign euro assets. Eurozone leaders need to be ready. There will not be time for meetings of finance ministers to discuss the outlook and debate the politics of incrementalism. In panicked markets, investors flee to safe assets, sparking other flames.
Even massive injections of ECB liquidity may not be enough. When I ask developing-country veterans of financial panics what advice they would offer, their response is uniform: governments have to guarantee bank deposits and probably other liabilities. In the eurozone, the guarantees of some national sovereigns are unlikely to be sufficient and only that of the “euro-sovereign” will suffice. It is far from clear that eurozone leaders have steeled themselves for this step.
When financial markets get anxious, peril often strikes two or three links down the financing chain. So eurozone leaders need to be monitoring liquidity risks in the corporate sector. And if banks get emergency assistance, bank executives will need to be pressed to keep providing customers with cash.
No one wants to have to act on the “break the glass” instructions. But it is wise to read them and to be prepared. The seriousness of the emergency steps should encourage eurozone leaders to take precautions – such as getting ESM capital into banks now and agreeing on a medium-term funding assurance for countries such as Spain. This assurance could come from the ESM or partial deployment of eurozone bonds in ways that maintain market discipline on state financings.
This recommendation does not conflict with Germany’s call for fiscal discipline and micro-economic reforms. Those steps must be taken. Germany has understandably been unwilling to turn on its fiscal tap unless those reforms are realised. Yet Germany will not achieve its strategic aims of a more integrated and fiscally sound eurozone unless it supports reforming states and prepares for contagion. Good leaders anticipate. They ready themselves to move quickly – and seize the moment to further larger ends.
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