Grexit Sturm und Drang

Europe has problems. A barrel of Brent crude fell below $52, causing the euro to drop to a nine-year low, $1.19, against the dollar. A contentious meeting of the European Central Bank will be held on January 22, a few days prior to the election in Greece, to consider some form of quantitative easing in order to stave off deflation. As Jack Ewing explains in "Falling Euro Fans Fears of a Regional Slowdown":

The further declines in the euro and in oil did not change expectations that when the European Central Bank meets on Jan. 22 that it would unveil further stimulus, broad-based purchases of government bonds, so-called quantitative easing. 

When deciding policy, E.C.B. officials are probably focused on the inflation rate more than the value of the euro or the price of oil, and the German data indicated that inflation continues to fall to levels considered dangerously close to deflation — a downward price spiral that is poisonous for corporate profits. 

German inflation was just 0.1 percent in December, according to an estimate by the government statistics office. 

An official estimate of inflation in the eurozone as a whole is to be released on Wednesday. Analysts expect the rate to fall to close to zero or even below it, putting further pressure on the European Central Bank to act.

Germany, which is dealing with a burgeoning nativist movement that is eroding the base of support for mainstream conservative parties (Alison Smale, "Anti-Immigration Rallies in Germany Defy Calls to Desist"), will argue against quantitative easing. The Germans will reason that the oil-price drop will act as a form of stimulus:

There are still many economists and public officials, though, who maintain that in fact cheap oil and a cheap currency are overwhelmingly good for Europe. One of them is Jens Weidmann, president of the Bundesbank and an influential member of the Governing Council of the European Central Bank. 

“The cheaper oil price works like a stimulus program,” he said in an interview published Sunday by the Frankfurter Allgemeine newspaper. “Consumers and companies have to spend less and can consume and invest more.” 

The statement was a signal by Mr. Weidmann that he remains skeptical about whether more E.C.B. stimulus was needed. 

While a majority of the E.C.B. Governing Council appears to support embarking on a quantitative easing program, members may be reluctant to risk alienating Mr. Weidmann and the larger German public whose views he represents. Germany worries that it might get stuck paying a big part of the bill if the European Central Bank loses money on any eurozone government bonds it might buy as part of quantitative easing.

These German worries of being left holding a huge bag of worthless bond paper are compounded by Syriza's lead in the Greek polls. Alexis Tsipras, the leader of Syriza, has promised if elected to renegotiate and possibly repudiate loans with the troika (European Commission, European Central Bank, IMF). For the last week German government officials have been lecturing Greeks to stay in line and not monkey with austerity. Liz Alderman has a helpful summary today ("Euro Countries Take Tough Line Toward Greece") of this hectoring:

On Monday, Germany’s economics minister, Sigmar Gabriel, said Europe would not accept undermining the stability that has returned to the eurozone in the last couple of years.

“We aren’t vulnerable to blackmail,” he said in an interview with the German newspaper Hannoversche Allgemeine. “We expect from the Greek government — regardless of who will form it — that the agreements made with the E.U. will be respected.”

Last week, Wolfgang Schäuble, the German finance minister, cautioned Greece against moving away from its current economic reforms, saying: “If Greece takes another path, it will be difficult. Any new government will have to stick to the agreements made by its predecessor.”

In an acknowledgment of the delicacy of the situation, German officials on Monday quickly backed away from a weekend report by the magazine Der Spiegel that suggested that Chancellor Angela Merkel and Mr. Schäuble believed that the eurozone could cope if Greece quit the euro and returned to the drachma.

A government spokesman denied that contingency plans had been made for such a possibility, and insisted that Germany wanted Greece to remain in the eurozone.

Officials in Brussels, too, emphasized Monday that membership in the euro bloc was “irrevocable,” although they left open to what extent Greece could renegotiate the terms of its bailout after the election.

“The euro is here to stay,” said a European Commission spokeswoman, Annika Breidthardt.

Guy Verhofstadt, a former Belgian prime minister who leads the Liberal group in the European Parliament, called the idea of a Greek exit, or “Grexit,” from the eurozone “nonsense,” not only because most Greeks do not want to leave the euro, but also because European taxpayers would wind up losing billions of euros that Greece owes them.

If Greeks can hold on and weather the threats and fear mongering (incumbent prime minister Antonis Samaras is campaigning on a purely fear-based appeal asserting that a havoc-plagued Grexit will result if Syriza triumphs) and Syriza can form a government, Tsipras will have a solid bargaining position. Europe is engaged in a pestilential fiction that an austerity-ravaged Greece can actually pay back the loans she has been awarded.

Alderman concludes her story by quoting two Commerzbank economists, Jörg Krämer and Christoph Weil, who say that renegotiation is the most politically expedient option Germany has, despite all the threatening noises from Schäuble et al.:

Still, most observers expect a Greece run by Mr. Tsipras would stay within the eurozone, and that a new Greek government would reach an agreement with its European creditors following a period of turmoil. After all, if Greece were to return to the drachma, the country would likely face new economic upheaval that it could ill afford. 

Preventing a Greek exit is also still desirable for Germany and other countries, since billions of euros in European taxpayer money could be wiped out if Greece were to leave the euro, raising the risk of a political backlash against leaders in those countries, said Jörg Krämer and Christoph Weil, the Commerzbank economists. 

“It would be much easier politically to renegotiate a compromise with Greece, albeit a lame one, and thus maintain the fiction that Greece will pay back its loans at some point in time,” they said.

The fear mongering has just begun. Greeks will pummeled with every type of propaganda and every form of thought control over the next three weeks. Dire warnings of anarchy will be broadcast. The proud Scots were made to buckle recently. Can we expect the Greeks to act rationally and vote to reject the pestilential fiction of austerity?

Last week I was sanguine. Years of brutal benefit cuts and high unemployment would inure the Greek voter to fear mongering at the polls. Now I am not so sure. Deflation on the European continent is going to up the ante and turn the January 25 poll into total war. No effort will be spared to maintain the neoliberal credo of austerity. Alderman reports that Tsipras has only a three-point lead with 20 percent undecided. Not terrific numbers.