Greece

Greece can be seen as the 'sovereign' analogy to Lehman Brothers; small, but with huge implications: risk of contagion, financial market panic and then a sudden urgency to “put one's house in order”.

Everyone agrees in the need for a 'firewall'. But can there be a firewall that is robust enough? Furthermore, given the poor ‘performance' of Europeans on such matters, can one be confident that such a firewall will be sufficient? 

Experience has not been encouraging. Unlike the US and UK, where there has been good progress in recapitalizing the banks, minimal steps have been taken in Europe. In addition, political leadership has been scarce and inconsistent, lacking the vision necessary to address problems which themselves involve a product born out of a 'vision' (the Euro).

What is more, 'hard-line' statements (e.g. 'no' to restructuring of Greek debt) have been (predictably) abandoned during the course of the crisis, with consistent denial to accept that the problem is crucially one of 'solvency'.  
The FT reports today that "Germany rules out common euro bonds"..could this be the next one?

Ironically, the more rigid a stance, the harder the 'backtracking' is going to be once circumstances force themselves, a theme we have seen creep up since 2010.

Importantly, as has so far been the case in every instance of 'resolution' / buying of time / 'can-kicking', it is the ECB that takes the wheel and steers the ship (see SMP, LTRO, etc.), treading around the edges of its mandate. There is even a timeline of the financial crisis on the ECB's website...which ironically bears proof to this statement.

The ever critical role of the ECB at present is well-highlighted by several commentators (see, for example, this comment by Andreas Koutras). 

It is also a point made by Jean Pisany-Ferry in the FT; he correctly points out that the credibility of a hard-line stance needs to be backed by concrete initiatives that will 'beef up' the necessary firewall and make it work.

The bottom line is this, in my view. 

First, Europeans do have a red line; a world with Greece out of the eurozone can exist tomorrow, however large the contemplated cost will be (in monetary terms as well as in terms of political capital) in the short term. 

Dangerous populists like the leader of 'Syriza' should acknowledge this and think/act accordingly (I doubt they have ever tried to). His party ranks second, with 16% of the vote: yes, a huge leap from 5%, yet less than the collective 18% of all parties who did not manage to elect MPs...But he walks around as if his party got 30% or 40%, insulting people’s mentality with his anachronistic, delusional and inconsistent rhetoric.

Greece has wasted a great amount of time and negotiating ammunition since the start of the crisis, haunted by an 'endogenous' lack of political cohesion and leadership. 

Nodoby is asking Greek politicians to adopt a 'nordic' mentality towards the common good overnight, but it is sad to see a bunch of 'followers' who cannot even talk straight to themselves (let alone each other) exhibit a uniquely unconstructive type of 'selective myopia' in their rhetoric (and lack of action). 

Maybe the state of Greek society has deteriorated so much (and for so long) that it has come to deserve this kind of leadership (or lack of it.)

Second, it is important to note that so far (and, unfortunately, this seems set to continue) initiatives in Europe have been taken after tremendous pressure, be it markets pushing sovereign yields higher or ''disturbing''' (but fully expected) election results unnerving investors. And even when things start to move, it is not politicians at the forefront, but the ECB.  But the capacity of central banks to 'do the work' for governments is not without bounds. Yes, Draghi has been more 'pragmatic' than Trichet, but my sense is we are now getting closer to the limits...with clearly destabilizing implications.

It makes one wonder if it will take another Lehman, this time on the sovereign side, in order to get Europe to realize if and how it has what it takes to move towards its desired (in words, but not deeds) direction. 


Below, Daniel Gros talks on Bloomberg about Eurobonds and the situation in Europe.