Naturally there is a lot of noise as to who is to blame for all of this. The fact is no-one is to blame but monetary union itself. The events of the past few months and especially twenty four hours have been the ultimate manifestation of the short-comings of the single currency. There is not a financial crisis in history that has not been solved without a combination of debt restructuring, monetary and fiscal easing, together with a currency devaluation. OK, we’ve had two out of three, but the private sector involvement seen in 2012 was not sufficient and without devaluation (impossible in a monetary union), Greece has been unable to overcome the huge competitive disadvantage it has built up within the Eurozone.
Even when we did have the debt-restructuring, it left Greece with a burden of debt and austerity (getting debt/GDP ration down to 120% of GDP) that was just unrealistic. I remember searching through a global database and was unable to find an example of a country that had managed to achieve this without a (further) default or devaluation.
So what we are seeing is the result of a political project started back in the 1970s. Back then, no central banker thought it possible to create a single currency without a monetary union. Eventually, during the 90s, it became apparent that this was going to happen, so the Stability and Growth Pact was the compromise for central bankers. Ironically, it was Germany that breached and softened it during their period of structural reforms early on in the life of the single currency, but they reformed and came out stronger.
Greece now finds itself in an impossible situation. Varoufakis says that there is no mechanism for a country to leave. But a default would lead to a mutualism of debt that would be contrary to the founding principles of the single currency, that no member state can take on the debts of another. It’s impossible to see how a country could remain in the Eurozone once this happens.
The only ray of hope for Greece is that a referendum accepts the offer on the table, Greece either defaults on or delays payment to the IMF, but has everything sorted by the time bonds have to be repaid back to the ECB on 20th July. Technically, the founding principles of the single currency could just about remain intact.
Even if this path its found, ultimately I still think Greece will leave the single currency at some point, the burden of austerity is too great and the ideological differences between the two sides are too large to be bridged (as the past six months have shown).
What this means for the single currency itself is a lot harder to predict. Near-term, naturally volatility is assured, especially to the downside. Even if a way through is found, the relationship is so damaged that delaying the inevitable cannot be taken as a good thing by the single currency. The bottom line is that the single currency is and always was a project where the politics came before the economics. That’s fine in the good times, but eventually the economics wins out and unfortunately for Greece this had now happened.