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Let us consider the questions any sensible person should ask about the fraught negotiations with Greece.
First, can Greece agree with creditors over debt restructuring or “private sector involvement”, with the “troika” over the latter’s participation, and with official creditors over a second bail-out? Can all this also happen prior to the next bond redemption, on March 20? The likelihood is: yes. If so, a disorderly default would at least be postponed.
Second, is it likely that such a programme would work at all well? The answer is no. It is near certain... that more debt reduction would be needed in the years ahead, even if everything went perfectly. It will not. Would the structural reforms envisaged generate a sufficiently dynamic economy and, above all, the improvements in net exports needed to finance the imports demanded at anything close to full employment? The answer, despite improvements in competitiveness, is: not quickly, even if it can be done at all.
Third, is such a programme in Greece’s own interest? The Greek policymaking elite believes it is. The alternative – a disorderly default and probable exit from the eurozone – would be a step into the unknown.
Fourth, would the additional Greek programme be in the interests of the rest of the eurozone and indeed the world? The answer is: probably yes, but not certainly so. The arguments in favour are that a disorderly Greek default, plus exit, could still generate panic elsewhere in the eurozone and that the costs of preventing this by helping Greece are not large, set against the costs of such disorder. The argument against this position is that the eurozone has the means to halt the spread of panic even after a Greek meltdown, particularly if the ECB and the governments were willing to act decisively, in response to any runs on banks and sovereigns elsewhere. Yet another argument against, not to be taken that lightly, is that it would be better to end the pretence that the programmes with Greece will work and so make clear that failure does have consequences.
Finally, what does the Greek epic tell us about the eurozone? Greece itself, though an important irritant, cannot be decisive for the future of the currency area. Yet the fact that this small, economically weak and chronically mismanaged country has been able to cause such difficulty also indicates the fragility of the structure. Its plight shows that the eurozone still seeks a workable mixture of flexibility, discipline and solidarity.
The eurozone is in a form of limbo: it is neither so deeply integrated that break-up is inconceivable, nor so lightly integrated that break-up is tolerable. Indeed, the most powerful guarantee of its survival is the costs of breaking it up. Maybe that will prove sufficient. Yet if the eurozone is to be more than a grim marriage sustained by the frightening costs of dividing up assets and liabilities, it has to be built on something vastly more positive than that. Given the economic divergences and political frictions revealed so starkly by this crisis, is that now possible? That is the most difficult question of all.
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