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The Greek patient is stable, now it’s time to work on a cure

Forget "Grexit," the ugly little term invented by some wit-challenged economist to describe Greece's impending exit from the euro zone. A year or so ago, a lot of economists, commentators and scribblers – myself among them – thought Greece was a goner. Some still do, but the number is dwindling rapidly. So now we have to invent a term to describe Greece's non-exit (my imagination fails me here).

Greece seemed certain to walk away from, or get pushed out of, the 17-country euro zone because its debt load was unsustainable and its economy was in free fall – down 20 per cent since 2008 – in good part because of harsh and sometimes hypocritical austerity programs designed by the troika, shorthand for the International Monetary Fund, the European Commission and the European Central Bank (hypocritical because the troika is happy to see the government fire workers, but not cancel orders for billions of euros of military hardware, like German submarines, that Greece neither needs nor can afford).

The theory was that Greece's only hope of salvation lay in reprinting the drachma and devaluing its way back to prosperity, as it had done on and off for the better part of two centuries. The new thinking is that Greece's exodus would do more damage than good to itself and to the euro zone.

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That may be true, but keeping Greece inside the tent will make it a ward of the troika for years, maybe decades. Welcome to the new federal Europe, where the weakest countries will be treated like the weakest American states or Canadian provinces. This is conveyor-belt economics – wealthy countries subsidizing poor countries for the greater good of the whole.

The anti-Grexit movement began in earnest in August, when ECB boss Mario Draghi said the bank would do "whatever it takes" to keep the euro zone intact and that the euro was "irreversible." Sovereign bond yields have come down since then, taking the edge off the crisis, even if Spain seems likely to ask for bond-buying help from the ECB and the new €500-billion ($646-billion) rescue fund, the European Stability Mechanism.

Since then, Germany has diluted its hard stance on Greece. German Chancellor Angela Merkel condescended to visit Athens to place her "solidarity" with the Greek people on full display. Her Finance Minister, Wolfgang Schaeuble, earlier this month said he expects Greece to stay in the euro zone. "I think there will be no government bankruptcy in Greece," he said.

Why the change of heart?

The troika's fear is that allowing Greece to leave – that is, proving the euro is indeed reversible – would trigger a speculative feeding frenzy that would send bond yields in Spain and Portugal, maybe Italy, to catastrophic levels, guaranteeing defaults, wrecking their banks and forcing the countries out of the euro zone.

But wouldn't exit and devaluation save Greece? Royal Bank of Canada's investment arm on Friday estimated that the new drachma would lose 55 per cent or more of its value against the euro and the dollar (Argentina's default sent its currency down 64 per cent in 2002 and Russia's ruble dropped by 51 per cent in 1998). That would make Greek exports suddenly cheap. The trouble is that Greece doesn't make much of anything that the world wants to buy – it is not an exporting economy, like Germany or Italy. Most of its essentials, from oil to grains, are imported. Using a cheapo currency to pay for imports would send inflation to monstrous levels and trigger social chaos.

So Greece appears to be stuck in a hell made by its own fecklessness, greed and stupidity, its fires fanned by the troika's nasty austerity programs. Youth unemployment is 55 per cent, the economy is expected to keep shrinking and businesses are closing in droves, not necessarily because of the recession, but because they're incapable of getting credit as Greek banks go into zombie mode.

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If Greece is to stay put, the troika is going to have to make life a bit more bearable for the Greek people if it doesn't want to see cities go up in flames (in a riot I covered in Athens in February, 40 buildings were gutted when the city centre turned into a war zone). That means the ECB will have to continue propping up the banks with massive liquidity injections and the troika will have to water down its austerity demands, giving Greece a few more years to meet debt and budget deficit targets.

The troika might even want to help the Greek pensioners and the unemployed by guaranteeing their benefits for a certain period. Greeks have lost all confidence in government finances and institutions and are paralyzed with fear that these benefits will be lost, which only makes the recession worse. Guaranteeing or supporting benefits would also deliver the signal that the troika is not out to destroy families along with the economy, all for the sake of pleasing foreign bond investors.

Preventing a Grexit will cost tens of billions of euros, perhaps hundreds of billions, over time and could involve a second sovereign debt writedown and a third bailout. The alternative – the shattering of the euro zone – might be way more expensive. Pity that no one in the troika examined Greece's financial statements before 2008. Exposing the lies about Greece's financial health back then would have saved fortunes – and perhaps a continent.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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