Perhaps Greece won’t leave the euro, after all

Recall the reasons for the current euro panic: Greece is getting bailed out and, in return, it’s supposed to cut spending and raise taxes even further. But Greek voters don’t enjoy this austerity and are rebelling against politicians who agree to the deal. So Germany’s now hinting that Greece might get booted from the euro. Disaster, right?

Greek newspapers that probably say a bunch of apocalyptic things. (Simon Dawson - Bloomberg) Well, perhaps not. Lately there have been signs that this situation won’t end in total apocalypse, after all. Kate McKenzie points to a new poll suggesting that Greek voters are slowly turning away from Syriza, the leading leftist party that’s threatening to rip up the bailout agreement (and hence risk a Greek exit from the euro). The Greek elections are on June 17. If voters turn away from Syriza and end up reelecting the two parties that support the bailout-for-austerity agreement, then Greece has a somewhat better chance of staying in the euro.

Okay, but what if this doesn’t happen? What if June 17 rolls around and the Greeks elect Syriza after all? Over at the Peterson Institute for International Economics, Jacob Funk Kirkegaard is skeptical that Greece would actually leave the euro even then. He thinks the country might, at worst, repudiate support from the rest of Europe and “suspend” its debt payments but still stay in the euro — the country wouldn’t default entirely.

“A Syriza-led Greece,” Kirkegaard writes, “would become like Monte­negro — that is, a country that uses the euro as its currency, but that lacks direct access to any economic support from euro area institutions.” Without bailout money from the IMF and the rest of Europe, the Greek government would have to push even more austerity and start paying everyone in IOUs. The Greeks would no longer be subservient to German demands, sure, but they’d be in rough shape. Eventually, Kirkegaard says, voters would get sick of this and vote back in a government that’s willing to bargain with Europe. (John Dizard sketches out a similar scenario here.)

Of course, Greece isn’t the only country that could cave in the current stand-off. Henry Farrell reminds us that Germany also has a lot to lose from a crack-up of the euro. “If I were to lay a bet on which side is likely to fold first,” Farrell notes, “I’d be putting my money on the Germans.” In this case, folding would probably involve Germany putting up more money so that Greece could remain in the euro on somewhat easier terms.

But that leaves another possibility — even if Greek voters don’t want to leave the euro, the country is still suffering from a slow-motion bank run that’s draining the country of actual euros. Without increased support from the European Central Bank, Greece might have to abandon the euro anyway, even if voters didn’t want to, just because it was running out of cash. We’d be back in crisis territory.

Over at the Financial Times, Wolfgang Münchau sizes up this situation. He notes that Greece isn’t the only country at risk of “bank jogs” — savers in Spain, Ireland, Portugal and Italy are also taking their euros out of their nation’s banks. Münchau argues that the only way to stop the bleeding is with a “eurozone-wide deposit insurance and bank resolution regime.” This would be similar to what the United States does with the Federal Deposit Insurance Corp. (If a bunch of banks in Delaware fail, Delaware doesn’t have to deal with the problem all by itself.)

Is that likely? Nobody knows. But these are the hints that fears of a Greek exit (and euro implosion) are overblown. Still, as Farrell notes, what we basically have is Greece and Germany engaged in “brinksmanship,” which means there are likely to be lots of points at which things look extremely dangerous. You can’t have a good game of chicken without the prospect of a crash. But that also means that, with a few miscalculations, the whole thing really could end in disaster.

Related: How a bank run could force Greece out of the euro