No Exit for Greece

By JOSEF JOFFEJAN. 12, 2015

The New York Times

HAMBURG, Germany — Another Chapter 11 for Greece, the third in five years — and no exit in sight. The Greeks won’t do the eurozone the favor of absconding from the common currency. Never mind that they should never have been accepted in the first place, when they cooked the books to look prim and proper.

Not even Alexis Tsipras, the leader of the radical leftist Syriza party, wants out. Apparently on track to win the snap elections on Jan. 25, he has vowed: “We will stick with the euro, no doubt.”

Nor does anybody else — including Germany — want Greece to leave, if truth be told, even though the German leader, Angela Merkel, now has her minions spreading the word that a “Grexit” is no longer an absolute no-no. If Mr. Tsipras wins and then imposes another haircut on the country’s creditors while nixing market reforms and fiscal rigor, then it will be auf Wiedersehen to Hellas. So goes the unspoken — but ultimately hollow — threat from Berlin.

In the meantime, Ms. Merkel’s spokesman has volubly denied that threats, even implicit ones, were made. Nonetheless, the euro crisis is back to where it started five years ago: in Greece. Is it another rising tide that will recede, as in years past, or a deadly tsunami that will drown first Greece and then the eurozone?

Unless you overbought now-melting Greek bonds, sit back and enjoy the theater with its two starring antagonists, the chancellor of Germany and the would-be prime minister of Greece. Ms. Merkel, as is her habit, deploys innuendo and leaks. Mr. Tsipras flings wild-eyed threats. He wants to “tear up” austerity pledges and stop servicing Greek debt, invoking the metaphor of the Cold War’s nuclear standoffs: “If one side pushes the red button, then all will lose.”

This is the core of the crisis: a monetary game of chicken. As we know from war gaming, the party that appears to be crazier than the rest tends to score. Strategists call this the “rationality of irrationality.” Foam at the mouth, and you’ll get your way more easily than meekly asking for another 100 billion euros.

Crazy the game is not. The Greeks have been saved twice: in 2010, with 110 billion euros ($147 billion), and in 2012, with 130 billion euros ($173 billion). In 2011, private investors had to take a 50 percent write-down on their holdings of Greek government debt. These bailouts have created their own expectations in Greece.

Monetary war is a bit like nuclear war in this respect: Everyone knows how to start one, but nobody knows how it will end. A Grexit might get rid of a noisome neighbor, but it might also bring down the whole house of the euro.

In their more sober moments, Greek politicians might play a friendlier game. They could trot out what they have already achieved. Growth, which just three years ago was in negative territory, with the Greek economy shrinking about 7 percent a year, is now not much worse than Germany’s. Unemployment — still a whopping 25 percent — is falling, though ever so slightly.

Unfortunately, there is a darker side. Austerity measures inflicted by the eurozone and the International Monetary Fund have not been quite as cruel as Athens keeps claiming. The debt of Greece’s central government has almost doubled since 2011, and gross external debt has since risen from 370 billion euros to 412 billion over the same period. So Greece is still living beyond its means.

Hence crisis No.3. Athens’s exposure to foreign lenders is rising once more. In everyday language, the Greeks cannot get their act together. Worse, if Mr. Tsipras does win a parliamentary majority at the end of the month, he has pledged to unleash a wave of public spending to reward his supporters.

Strangely, this gambit is not irrational brinkmanship. If Syriza does come to power (though at the moment its lead is shrinking), the new government will yield here and there to make nice with Ms. Merkel. But any government, left-wing or centrist, knows one big thing: Greece has a history of bailouts on its side. That will dampen the passions of ardent reformists.

By contrast, the German leader does not have Europe on her side. France and Italy, just to name the big two, have been trying to get out from under the chancellor’s whip for years. Unable, like Greece, to bring forward labor market reforms and economic liberalization, Paris and Rome are clamoring for an end to fiscal discipline, which would allow them to allocate their (or their creditors’) money to lavish deficit spending. The Mediterranean mood is working for Athens.

Also, with its tiny economy, Greece can and will be saved, again. It is too small to fail, so to speak. But together, France and Italy represent Europe’s hard-core problem, which is economic stagnation over time — despite a long history of deficit spending.

Forget the Grexit issue: It’s Europe’s historical trends that should worry us. In the decades since the economic miracle days of the ’70s, real growth in the European Union has dropped on average by three-quarters of a percentage point. Productivity growth has likewise slid, to 0.4 percent from about 2 percent per year. These ailments are deeply embedded in economies that lag behind on investment, innovation and competitiveness.

Greece’s problems are peanuts, relatively speaking. But Europe as a whole is beginning to look like Greece writ large. This magnificent continent has invented everything from the Renaissance to the MP3 player. Unlike Greece, the European Union is enormously rich — its G.D.P. is actually a little larger than the United States’. But the long-term data whisper to Europe as well as to Greece: Reform or decline.

Josef Joffe, a fellow at the Freeman Spogli Institute for International Studies and the Hoover Institution, both at Stanford, is the editor of the German newspaper Die Zeit.