Germany Must Decide: When And How Will Greece Leave The Euro?

Bill Frezza Fellow, Competitive Enterprise Institute
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After years of self-delusion, European central planners are being gobsmacked by reality. When you clear away the fog spewed by the traveling circus of Greek Prime Minister Alexis Tsipras and his finance minister Yanis Varoufakis, two crucial questions need to be answered. First, will Greece be ejected from the euro now or later? Second, will the Grexit be orderly or disorderly? Everything else is narrative management.

For their part, the Greek people have spoken. By electing Syriza they’ve made it clear that they not only refuse to consider the one thing that could save their economy – which is to repeal job-killing labor regulations and licensing laws – but they won’t even tolerate pretend reforms. Greeks, proud as they are, would rather all starve than allow the country’s few remaining entrepreneurs to get the economy moving again by starting businesses without having to stuff bureaucrats’ pockets full of fakelaki.

If one principle informs the communist professors who now occupy the Greek cabinet, it is Lenin’s maxim that “the capitalists will sell us the rope with which we will hang them.” Varoufakis recently proposed to exchange outstanding Greek debt for perpetual bonds with no maturity date and payment schedules tied to future growth. This scheme is as brilliant as it is laughable. In effect, Varoufakis is telling creditors that if they want to go on as before in order to avoid recognizing their losses, he is happy to spend their money rehiring armies of do-nothing Greek civil servants. And, oh, how about a bridge loan so we can work out the details?

If you don’t back me up, he threatens — pause for dramatic effect — “When I return home tonight I will find a country where the third-largest party is not a neo-Nazi party, but a Nazi party.”

Thus far, the EU’s German paymasters appear to have rebuked Syriza’s call for negotiations. But appearances can be deceiving. A groundswell of support from other deadbeat European governments (egged on by investment bankers who smell fee opportunities peddling toxic bonds) could easily overcome German rectitude. Who says the life of the Rube Goldberg contraption of a currency that is the euro cannot be extended for another round or two? If this approach prevails, the answers to the questions posed above will be: later and disorderly.

And so, the pressure builds. Never in human history has such a highly integrated global monetary system experienced such a reckless period of money printing without creating a hyperinflationary spiral. The reason? The magic of modern high finance has disguised the impact, directing the tsunami of funny money into stock market and asset bubbles that project an illusion of wealth and recovery.

These bubbles serve another purpose, beyond enriching those who believe they are smart enough to rush for the exits first when the crash comes. The zeitgeist narrative that Happy Days are Here Again may last long enough for the Fed to begin normalizing interest rates this spring. If it does, all hell will break loose, because once the zero-interest rate carpet is pulled out from under the financial machinery, it will be clear that a good deal of the world’s sovereign debt will never be repaid, making it unusable as collateral. At which point the $700 trillion derivatives pyramid almost certainly implodes.

Nothing will stop Greece from barreling down the path predicted when I wrote “Give Greece What It Deserves: Communism,” back in 2011. Frankly, I never thought the farce would go on as long as it has. Yes, if the Germans blink again, it may go on a bit longer. But the final outcome is not in doubt. Greece is doomed, and with it so is the euro. No one understands this better than Syriza, who see doom as their path to power. Carefully listen to their words. Greece’s finance minister may be a communist but that doesn’t make everything he says a lie. “I am the finance minister of a bankrupt country,” Varoufakis proclaims, flipping the monkey onto his creditors’ backs. So, what are you going to do about it?

More appropriate would have been the immortal words of Eric “Otter” Stratton, “You f’cked up. You trusted us!”

Bill Frezza is a fellow at the Competitive Enterprise Institute and the host of RealClear Radio Hour.