Some of us have been talking it over, and here's what we think the endgame looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on credit from the European Central Bank to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope it will need both guarantees on its debt to hold borrowing costs down and a higher euro zone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we're talking about months, not years, for this to play out.
A brief blast from the past:
As [Barry] Eichengreen argued, any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. So the idea of a euro breakup was a nonstarter. But now I'm reconsidering, for a simple reason: the Eichengreen argument is a reason not to plan on leaving the euro — but what if the bank runs and financial crisis happen anyway?
What I hadn't realized when I wrote that two years ago was the extent to which euro zone banks could float through a slow-motion bank run by borrowing from the European Central Bank. So the real moment of truth comes if and when the E.C.B. — or more accurately the Bundesbank, which may ultimately be on the hook — decides to pull the plug.
The point, of course, is that this moment may not be far off.
Exit and Exports
If Greece exits the euro, then what for the Greek economy?
But people do seem to know some things that aren't so. In particular, I keep reading that Argentina's example is irrelevant because Greece has hardly any exports.
I don't know where that comes from, but it just ain't so, according to data from the World Bank.
What is true is that Greece doesn't export a lot of goods. But it exports a lot of services — shipping and tourism. How might these respond to the devaluation of the new drachma?
Shipping volumes presumably wouldn't change much — but since the prices would be in euros and dollars, they'd be worth more relative to Greek gross domestic product, so that would be a boost.
Tourism — well, cheaper hotels — could attract a lot of British and German package tours, as long as the political situation isn't that chaotic.
This isn't a prediction that everything will be fine, but it is a caution that the pessimism about Greek prospects once the turmoil is past may be overdone.