Suddenly the prospect of Greece leaving EMU looks horribly real. True, Greek voters continue to signal their continued enthusiasm for staying in. But this is at odds with their rejection of the austerity that is a precondition for the Eurozone’s financial support. German policy-makers have been especially vocal on this point.
But many Greeks believe that they are bluffing, thinking that they can’t be kicked out of EMU if they say ‘can’t pay, won’t pay’ on budget cuts. For their part, the Germans, and their friends in EMU’s hard-core, are keen to disabuse them of this idea. Their hope is that the Greeks will vote for parties that will fall into line and deliver yet more spending cuts and tax hikes to meet the terms of the bail-out deal.
This is a dangerous game and there will be no winners. The broad conclusions of ING’s report about the dire consequences of a Greek exit (see below) remain valid, despite official suggestions that it would be manageable. True, the private sector has already absorbed losses on their holdings of Greek government debt, but the continued contraction in the Greek economy and growing market fears of contagion in the Eurozone’s troubled periphery suggest that exit would be no less painful than we previously estimated.
So German suggestions that a Greek exit would be manageable can partly be seen as part of its campaign to persuade the Greeks that exit is a serious possibility. Yes, the economic cost of keeping Greece in will be high – the Greeks will have to swallow more budget cuts, and its fellow members may have to stump up more cash to soften their pain. But for both sides the immediate costs of exit would be far higher.