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Soft or Hard Landing
Next Stop: Grexit?

Everything old is new again: with bailout talks stalled, desperate Greeks are making a run on the banks in what Business Insider identifies as an eerie echo of past Greek crises:

Greece’s banks lost about €4 billion in bank deposits since the turn of the year as Greeks fear a return of capital controls that ban them from making cash withdrawals over set limits. Separately, the country looks as if it is tipping back into recession — GDP shrank by 1.2% in Q4 2016.

Does this story sound familiar?

It should. A collapsing economy followed by a run on the banks were the signal events of the Greek debt crisis that began in 2009 and never really ended.

So now people are asking — again — whether Greece might be forced out of the eurozone.

At this stage, the Greek debt crisis seems stuck in a cycle of eternal return, with Greeks and Germans alike perpetually clinging to their own comforting delusions to avoid uncomfortable truths: Greece will never be able to pay off its unsustainable debt load, and it cannot last in the Eurozone in the long term. The current chaos is just the latest manifestation of the refusal to cope with these realities, and prospects for Grexit now look more likely than they have since the summer of 2015.

The negotiators remain at loggerheads over fundamental issues: Greek Prime Minister Alexis Tsipras is battling the IMF over labor reforms and pension cuts, while the establishment in Brussels and Berlin refuses to accept the IMF’s insistence on Greek debt relief. If nothing gives, the IMF could decide not to participate in the bailout, effectively dooming it and raising the possibility that Greece would be forced out of the eurozone.

We have long argued that the best option is a negotiated soft Grexit, where Greece stays in the EU but leaves the Eurozone and receives the debt relief it badly needs to get back on a stable footing. But reaching that outcome would require the kind of sober analysis, political compromise, and forward-thinking leadership that is increasingly absent in Europe these days. The more likely outcome is a short-term bailout that kicks the can further down the road—or failing that, a chaotic and rushed Grexit that will serve no one’s interests.

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  • D4x

    What would happen if Germany re-adopted the Deutschmark, and the rest of the Eurozone stuck with the Euro? Better than having Greece use a Drachma worth what?

    • LarryD

      Greece must either learn to live within its means, or it needs the ability to devalue (or inflate, which comes to the same thing) its currency. The first is improbable, the second impossible as long as Greece is chained to the Euro.

      • Proverbs1618

        Keeping Greeks chained to the euro and forcing them to become competitive via deflation is BS. Let them go and inflate their way out of it.

      • Andrew Allison

        Greece is only “chained” to the euro by it’s need for more loans. If the loans stop, Greece can readily default on its euro debt (much of it held by German banks) and exit the eurozone.

    • Andrew Allison

      Not going to happen; 47% of Germany’s GDP is exports.

      • D4x

        Yes, but the author’s solution for Greece sounds dismal. Did not Mr. Mead recently dissect how Germany is using/abusing the Euro to support their exports in the Eurozone?
        Perhaps Greece can frack their way to prosperity…maybe import some real tax collectors…

        • Andrew Allison

          Yes, that’s why it’s not going to happen. Greece is fracked, and that’s all there is to it.

      • gabrielsyme

        One can easily read the whole Euro project as a way for Germany to discount their currency to gain a competitive advantage for their export industry while simultaneously undermining their competitors in southern Europe. And as an added bonus, attain unequaled power within Europe.

        Small wonder they are hated by the Greeks.

        • Andrew Allison

          One could read it that way. Alternatively, one might think that the Germans simply took advantage of the opportunity presented by the enthusiasm for a common currency.

  • Kevin

    Greece is small enough that it’s issues can be finessed, Spain, Italy, and perhaps eventually France can’t be.

    • Andrew Allison

      Spain is out of the woods. It’s a toss-up as to whether France or Italy will be the straw which breaks the euro’s back.

      • f1b0nacc1

        My money is on France….the Italians are such a mess that it is unlikely that even a total collapse on their part wouldn’t already be factored in…

        • Andrew Allison

          The collapse of any of the eurozone economies is unthinkable! [grin] But I agree that France may prove to be the Black Swan.

  • gabrielsyme

    As with so many other examples, the EU sceptics were absolutely right when the Euro crisis first hit that states such as Greece and Italy would be better off leaving the Euro. Eight years on Greece has barely stopped its economic decline, unemployment is unconscionable, social stresses are extreme, and the far-left came into power while the far-right has been strengthened. It’s hard to imagine a worse outcome.

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