Does the Greek deal strengthen the Eurozone? Markets react cautiously

Sigmar Gabriel, Federal Minister for Economic Affairs and Energy of Germany participated at the Transport, Telecommunications and Energy Council which focused on Energy, on 8 June 2015, in Luxembourg. Gabriel is also Vice Chancellor of Germany since 2013 and chairman of the Social Democratic Party of Germany as from 2009. Recently he is at odds with his colleague Wolfgang Schauble the German Federal Minister of Finance, over Greece’s position in or out from Eurozone. (European Council – Council of the European Union, Audiovisual Services, Shoot date: 08/06/2015, Location: Luxembourg. Snapshot from a video).

Is Eurozone strengthened after the Greek deal? At first reading the answer is a straightforward ‘yes’ because the other option, the Grexit, the exit of the country from the euro area, would have reversed the theoretically irreversible participation in the monetary zone. According to the Treaties, on which the Economic and Monetary Union (EMU) of the EU and the adoption of the euro is based, once a country is in, there is no provision for an exit.

Yet, the German Federal Minister of Finance Wolfgang Schäuble advertised that his experts had drafted a detailed plan for a temporary – presumably of five years – expulsion of Greece from the euro area. From what it has been made known about this plan no readmission terms were set not even in a nebulous manner. Understandably, the readmission would have followed the path of an initial entrance procedure, which may last for at least three or more years after the day the country fulfils a set of tough conditions. In short, once out, Greece would have stayed there for an indefinite time period.

Who prefers a Grexit?

Only a shortsighted economist would think that Greece’s ejection from Eurozone could be restored in the foreseeable future. For one thing, the vast foreign debt of the country would be a perennial burden. Even if a haircut of Greece’s obligations was facilitated outside the Eurozone, it would have been very difficult to convince the present generations of German taxpayers to again accept a country which has caused such a tremendous loss of money and brought many times the entire world to the brink of another financial crisis. The introduction of a national currency in Greece infested with continuous devaluations would have had negative repercussions only on this country.

There is nothing wrong in that for the global capital markets, and the German taxpayers would be at ease. However, Greece is still within the euro area but the question remains unanswered, if Eurozone is strengthened after the new, complex and onerous bail-out agreement which is soon to be signed between Athens and its creditors. Under its terms the country is to get a third bail-out package of €85 billion that the German Bundestag (Parliament) has already approved. The actual agreement is not yet signed because Greece has first to deliver a set of harsh fiscal austerity measures plus a large number of unpopular structural changes as ‘prior actions’. More austerity is to follow after the agreement is concluded in the next weeks.

Grexit: Still a real option

Many commentators have called those terms as contemptuous going very deep in challenging the country’s sovereignty. To be reminded that to this day Greece has received two bail-out packages, one in 2010 of a value of €120bn and then another one in 2012 of €140bn. Most of that money has been used to repay the country’s debts in full to German and French banks. The same is true for the third bail-out but now those debts have been ‘magically’ passed at face value to the European Central Bank and a number of Eurozone governments. In this way the Greek taxpayers have borrowed to save the euro area banking system and with it the global financial markets.

Coming back to our initial question, it’s very characteristic to note that Wolfgang Schäuble and the German Vice-Chancellor Sigmar Gabriel (also leader of the Social Democratic Party – SPD) have been fighting during the last few days in a very un-German and in many ways harmful for their country way calling each other a liar. The object of their dispute is if Gabriel was informed or not by the Ministry of Finance that Schäuble was about to raise in the crucial Eurogroup (19 Eurozone ministers of Finance) of Saturday 11 July the issue of a provisional five-year Grexit. For SPD it came as a very disturbing revelation that its leader Gabriel could have known about Schäuble’s plan to throw Greece out from euro area. The socialist party has been supporting Greece’s position in the Eurozone.

Somebody lied

This quarrel in now central in Germany’s political scenery and even revealed the breach between Chancellor Angela Merkel and her minister of Finance. Last Saturday, Schäuble speaking in an interview, went as far as to threaten with his resignation if his policies are not endorsed. All along last week he kept referring to a possible Grexit. This topic though – Schäuble’s proposal for a Grexit – was commented upon by major world media as tantamount to a detailed and full preparation for such an eventuality. In reality, it is as if Greece’s participation in Eurozone was reversed, at least on paper.

The world financial and political community learned then that the participation in the euro area is not ‘ad infinitum’ and under certain conditions a country can actually exit. In other words, the globe took account that Eurozone is not something standard and perennial and it can be unraveled. This is a great political and financial impairment for the euro, a money that Europe thinks can challenge the supremacy of the dollar as a global reserve currency.

Two german liars

That’s why the German political life is so deeply disturbed. The SPD doesn’t share Schäuble’s idea that euro’s future prospects will be strengthened without Greece. It is equally possible that the German socialists don’t have in their agenda such a grandiose dream, that the euro money to conquer the world. Nevertheless, the proposal of a detailed planning for a Grexit is tantamount to the end of Eurozone as we knew it. The natural question that follows is which country will be next and under what circumstances another exit from the Eurozone will be considered.

In any case, a Grexit, despite having been rhetorically ostracized in Brussels, will continue to lurk around, for as long as the country is in deep economic recession and its political environment quite toxic. Still, it’s not certain if a smaller euro area made up by mainly northern member states can support a stronger euro. It’s rather obvious though that a lot of people in Germany answer positively to this question. However, it’s also obvious that Germany is now divided about planning for the euro’s future and the same is true for other countries. For the entire European audience the Greek tragedy has posed many questions that should have been answered a long time ago.

Can Greece do it?

Finally, if Greece’s debt is rearranged in a way permitting a fast return to growth and the world sees that Eurozone is not only about some billions, then the euro area may rebuild the good image it had gained until Greece went bankrupt in 2010. So the answer to the initial question is that the new Greek deal may strengthen the Eurozone, but there are strong political forces which think otherwise. Even within Greece a good part of the governing SYRIZA party deputies opts for a return to the national currency, the drachma.

This option may lead to the same objective as the most conservative circles in Germany wish, the Grexit. Of course the SYRIZA extremists who oppose Alexis Tsipras’ choice for a third bail-out scheme don’t pay any attention to the strength of Eurozone. Schäuble though thinks that this will strengthen the euro and with it the power of Germany in the international financial and political arena. It remains to be seen which way Athens will lead the Eurozone.