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Greeks Bearing Debts
Disunion in Europe

The Eurogroup negotiations with Greek representatives in Brussels unexpectedly and acrimoniously fell apart earlier today. As The Financial Times reports:

A high-stakes meeting of eurozone finance ministers over the future of Greece’s bailout unexpectedly broke down early in deliberations after Athens angrily objected to a proposal that it continue with the terms of its current €172bn bailout, calling it “absurd” and “unacceptable”.

The draft text, obtained by the Financial Times, states that Greece would agree to a six-month “technical extension” of its current bailout, which Athens has long viewed as a red line, Peter Spiegel reports in Brussels.

[…] Shortly after Athens issued its angry objections, EU officials said the eurgroup meeting broke up after less than four hours of deliberations.

It looks like the other Europeans were genuinely surprised that Greece was so adverse to (and annoyed by) the suggestion of extending the current terms, even though that had been Syriza’s position both before the election and since. Both sides seem to be speaking different languages: the old pros have a certain expectation that, whatever the rhetoric, everyone will play by certain unwritten rules; Greece’s new party has no intention of going along with the old way of things and thought it had made itself clear.

Meanwhile, the immediate crisis is largely driven by Greeks themselves, who are pulling money out of their banks at alarming rates. The lending to the Greek banking system right now is mostly financing deposit flight by Greeks trying to get out of a sinking financial system. Many Greeks are aware that they are authors of this chapter of their tragedy, but on an individual level it makes too much sense not to pull the money out.

That doesn’t mean the Greeks have no alternatives. As Wolfgang Munchau notes, Athens has the option for a kind of non-GREXIT GREXIT: Greece stays in the euro but starts issuing government scrip. Cash strapped American states did this in the Depression; they were still part of the dollar zone, but they issued state promissory notes that traded (at a discount) and allowed them to pay their bills and their employees with something. Greece might well do something similar. The upshot would be that Greece would have two forms of money circulating at the same time. Brussels, meanwhile, has no mechanism in place to deal with this—or kick Greece out involuntarily. There are other options, too, some better, some worse. The Eurogroup, meanwhile, is talking tough, saying Greece has until Friday to accept an extension.

As the BBC points out, “79 percent of Greeks back the government’s stance in negotiations, and 74 percent believe it will succeed.” Under those circumstances, it would be suicidal for Syriza to back down prematurely; the party has convinced voters that it has a plan that will work, so it can’t just throw in its hand early in the negotiations. But what happens to the government’s public support if the strategy fails? Will voters turn away if it looks as if the government has been peddling false hope and sweet dreams, or will the people rally around a government they will see as having been insulted and mistreated by an unfair and uncaring EU?

The other unknown in the crisis is what Greeks will choose if and when it becomes clear to them that the only two choices are a hard and unpleasant austerity program or leaving the euro for good and all. The Greeks overwhelmingly want to keep the euro, probably because they know that their own government will mismanage any currency it can control.

Greece needs European money more than the eurozone needs Greek membership; that is the cold logic that, to non-Greek eyes seems to be driving events. But the Greeks, and perhaps their new rulers, don’t see it that way.

Interesting times.

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  • f1b0nacc1

    So let the Greeks create a scrip, and Gresham’s law will do the rest

    • Kevin

      Not quite. Many actors will refuse to accept the script. Will Greece be able to force them to do so?

      The resulting financial carnage and uncertainty will hit hard. I suspect they might be better off going for a clean exit which would address issues regarding credit and contracts much more forthrightly and bring greater certainty. Attempts by the Greek govt to pretend they are not doing something they really are will just prolong the suffering and pain. They should choose to stay or go, not try to straddle some half way point.

      • f1b0nacc1

        Of course they can force (many) of them. Start with government employees/vendors….they don’t have a lot of choice (California discovered this a while back), and that will go far to create a shadow economy of sorts. Yes, it will be very, very ugly (and I don’t disagree with you that a clean exit is a better idea), but unless the EUnicks cave, it is the most likely and practical scenario for the new Government.

  • Andrew Allison

    The Greek government assumed, apparently incorrectly, that the EU would pay any price to keep the country within the Eurozone. The EU’s spine is being stiffened not just by the fact that Greece wants to undo its current reforms today and promise to put in place new ones tomorrow, and by the impact of folding on reforms in Italy and Spain, but also by the fuel which doing so would add to the anti-EU fires currently burning within member countries.

    • Corlyss

      Greece has got ’em over a barrel, a position the Europeans should be used to by now.

      • f1b0nacc1

        A position (bent over the barrel) that both sides are familiar with….can’t they both lose?

        • Corlyss

          Both lost the minute they signed up for the faulty-premised Euro and EU. It just takes them Europeans a while to realize they’ve been deluded.

          • f1b0nacc1

            Absolutely, but the question is how much damage will they do to the rest of us in the meantime?

  • Fat_Man

    My advice to the Greeks. If you cannot get to a bank in a non-EU country that will have no interest in enforcing EU decrees, do not put paper money in coffee cans in the back yard. It is far too vulnerable to water, fungus, and insects.

    If you are going the coffee can in the back yard route, store gold coins which are impervious to such hazards and even to corrosion.

    The common one ounce coins like the Krugerrand, are a good choice, but they will cost more that €1000. There are plenty of non-numismatic coins of lower weight, e.g. the British Soverign which is less than ¼ ounce of gold, and will cost correspondingly less. There are even British coins ½ and ¼ the weight of the Sovereign.

    • JR

      Honestly, if you feel like you have to own physical gold to protect the value of your assets, who really cares how much it costs. You got bigger issues. Greece has to leave the euro, I truly do not see how it can work any other way.

  • Corlyss

    So my money is on the Greek officials being bought off to “play nice” with their tormentors.

  • Pete

    Look, everyone knows that without massive subsidies (welfare) from the EU or elsewhere, Greece will become a Third World country in short order.

    The Greek intransigence in the current negotiations is a sign of desperation, not strength.

  • FriendlyGoat

    Whether various Europeans accept the unity premise or not, why shouldn’t we observers predict that the more there is fragmentation of the Euro zone, the more they are all vulnerable to chaos?

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