A few months ago mention of the Euro currency area breaking up, of countries going back to a national currency, was officially verboten. Today the impossible has become the inevitable: between the crushing depression era poverty, the silent-but-deadly run on Greek banks, the clueless indifference of EU élites and the voters' flight from mainstream parties everyone is now confident that it's only a matter of time before Greece reverts to the Drachma and the Euro dream is officially over.
I think they're wrong. Today I bet* a modest sum that Greece will still be in the Euro at the end of 2012 and that the Euro will still exist as a currency in 2015.
I wrote last week that there are only 3 possible ways out of the Euro problem:
1. Richer Euro members make large annual payments to poorer members.
2. Richer Euro members guarantee poorer members' debts.
3. The Euro breaks up.
All 3 solutions have been ruled impossible, but eventually at least one of them must happen. It's an interesting problem.
Media opinion seems to be swinging behind the idea that we're heading for breakup, but the more I think about the practical details of that the more I doubt that it will be allowed to happen. The logistics of the thing are overwhelmingly difficult and in the short term it will make life in Greece even worse, and already it's pretty bloody grim.
The argument for breakup is that it will cause even more short term pain, but in the long term things will be better. However, that's not the kind of decision that the EU's leaders tend to take. They do not like to be brave. They do not tackle difficult choices head on. They do not take a bold position and risk being wrong.
Instead, they like to hide, to shrink from controversy, to smother people with warm words and euro-babble until their goal has been achieved without anyone really noticing. Most of all, they like to make the European Union bigger, grander and more powerful. For these reasons, and especially the last, I think they will do absolutely everything to avoid Euro break-up.
So we're back to impossible option 1 or impossible option 2. I suspect we will see a combination of the two:
- a clear expression of solidarity that the whole eurozone will stand behind each of its members' debts. This is necessary (and hopefully sufficient!) to prevent the run on Greek banks which is already happening. I suspect mutual guarantees rather than official eurobonds, because it's fudgier and the EU likes to fudge.
- large cash transfers (which will be described as a temporary measure) to ease the burden on the Greek people, who are genuinely suffering. Offering more loans would be easier to sell, politically, but I think (or at least, I hope) they will realise that the arithmetic of even more debt simply doesn't work.
But the quid pro quo will be an enormous degree of EU control over national budgets, taxes and economic reform. The Fiscal Pact is just the beginning. If northern Europeans agree to underwrite and subsidise the Club Med states to this extent, then having different pension arrangements, employment protection, closed shop economies and so forth will become politically untenable. The south will have to reform and I can't see the north just trusting that they'll do it by themselves: it will be managed from Brussels.
Germany has benefited greatly from being in the Euro: its export-driven economy has been able to relentlessly sell goods to most of the rest of Europe without its currency rising, which would have made its exports dearer to foreigners. This has been a windfall for German businesses and a burden on almost everyone else. The Germans are not keen to acknowledge this, preferring the "hard working Germany, lazy southern neighbours" narrative, but it's true nonetheless. I think that will provide the cover to sell the idea.
The other benefit is that it avoids any dramatic climax. Money will be quietly bled from one group and given to another, but the hope will be that no one really notices and there'll be no key moment to galvanise opposition. That's exactly how the EU likes to operate.
Coincidentally, the plan involves the EU becoming even more powerful at the expense of member states, which is really the only thing that they care about.
That's why, for my money, the Euro will survive and Greece will probably stay in it.
* William Hill offer a market to bet on the euro, albeit intermittently. They were offering 3 markets earlier today: Greece to leave Euro in 2012, Euro to still exist in 2015, and which country will be the first to leave. But this evening they are no longer taking bets on any of those markets. There was no explanation given, but I assume they'll reappear at some point. I presume that volatility is the reason, or perhaps they're only willing to take so much exposure. Ladbrokes have sometimes offered a market on the euro, as well.