The coincidence of comments from Germany - both the Bundestag's Hasselfeldt "If a country is not in a position to fulfill its obligations, or is unwilling to, then it must leave the Euro zone"; and vice-Chancellor Philip Roesler (of the FDP) to the effect that the dangers associated with a Greek exit had faded - and the IMF (which has been suspect for a while in its 'steadfastness' with regard Greece, seem to suggest as UBS notes, that there is notable suspicion of collusion among the politicians to apply pressure to the Hellenic Republic. Against becoming too concerned there is the Realpolitik of the Euro area. Decisions about the direction of the Euro project are taken by a very small coterie of political leaders within the Euro area, and we should be concerned not necessarily because of the specifics of the comment or the associated “hardball” bargaining stance, but because politicians still feel that comments like this can be made at all without fear of repercussions. As silly season is set to begin, we should prepare for the impact of politicians need to hear themselves speak.
UBS: Greece, Germany and the problem of politicians
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Against becoming too concerned there is the Realpolitik of the Euro area. Decisions about the direction of the Euro project are taken by a very small coterie of political leaders within the Euro area. Junior politicians, even senior politicians at a national level are not likely to guide the process of negotiation, nor do they necessarily have privileged information of the thinking of those at a heads of government level who do in fact take the decisions. As the “surprise” outcome of the nineteenth summit to save the Euro in June indicated, we should not become too focused on the opinions of those who do not sit at the decision making table of the councils of Europe.
Why should we be concerned? We should be concerned not necessarily because of the specifics of the comment or the associated “hardball” bargaining stance, but because politicians anywhere still feel that comments like this can be made at all without fear of repercussions. The danger is not in protracted negotiations with Greece, or in the risk of further Greek default (which must be thought to be inevitable at some point). The danger lies in the casual way that such comments are uttered by politicians. There are perhaps three reasons why this sort of comment causes economists to wince with intellectual pain.
- Politicians are ignoring the costs of departure. The idea that a fragmentation of the monetary union is possible at low cost has been countered by private sector research and by government studies (including, of course, the German Finance Ministry). We believe that the costs of a Greek exit to Greece itself would be horrific, in economic, political and social terms. However the cost to the rest of the Euro can not be discounted - including rising risk premia, reduced trade, and financial system volatility.
- Politicians are being inconsistent. There is a suggestion of moral hazard – if one country renegotiates, then others will want to renegotiate the terms of their own agreements. That is valid. But the insistence on moral hazard over renegotiation ignores the immense hazard of exit. If one country leaves the irrevocable monetary union (proving that exit is indeed possible and what is irrevocable can in fact be revoked) then other countries are likely to come under probably relentless pressure to leave. There implications of political remarks like these are that countries will leave or not leave as a consequence of their own decisions. These political comments make no allowance for the powerful and potentially overwhelming exogenous forces of the markets and bank runs. Evidence that politicians believe that they can confine a Greek crisis to Greece is alarming. If Greece exits, other countries would very likely follow suit in a very short space of time. The idea of a “firewall” around Greece is meaningless, in our view.
- Political leaders could actually lead. There is a risk that by providing such opinions (even if a negotiating tactic) political leaders will influence market opinions and risk perceptions and thus aggravate the economic problems of countries within the Euro. International investors are not intimately familiar with the intricacies of national government politics in the Euro area. It is therefore hard for markets to distinguish between political posturing by less influential politicians, and substantive points of negotiation by politicians that carry more weight. Politicians making comments about the implications of a crisis may in fact bring about a crisis that they are subsequently unable to control by provoking an investor reaction.
With August looming, the prospect of high profile comment in the Euro area is increasing. August is known by the British tabloid media as the “silly season”, when a shortage of substantive news gives prominence to “silly” stories and views in order to fill the pages of newspapers. Unfortunately there is a risk in the Euro area that such “silly” political stories will still have real world economic implications. The best hope for some calm in the Euro may lie in the combination of news first from the Olympics and then from the US presidential race lowering the profile of Euro politicians.