The deadline for private bondholders to agree Greek 'haircuts' passed last night. Although 85% decided to take part, the Greek government will still have to activate the collective action clauses (which force compliance) to get it up to 95%. At the same time, it faces legal action from those who took the bonds out under foreign law.
There is also the question of whether the new bonds will ever pay out. They are trading at a large discount suggesting that the market still thinks that Greece will fully default. Investors also remain concerned over the likes of Spain and Portugal.
But the biggest threat to the euro now may not come from these peripheral' countries. Instead, it could be their more solvent northern neighbours who put an end to the euro as we know it. There is increasing talk of the 'Neuro' countries forming a breakaway union - Germany, France, Belgium, Austria, Finland and the Netherlands.
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The far-right Dutch Freedom Party (PVV) has called for the Netherlands to quit the euro. Of course, its leader Geert Wilders is regarded as an eccentric and an extremist by many. However, the PVV cites a report from respected consultancy Lombard Street Research (LSR) - who, in the interests of full disclosure, I used to work for -to justify the case for exit.
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Are they right? Would the Netherlands really be better off out? And would it make the break up of the single currency more likely?
How would a euro exit benefit the Netherlands?
The logic behind Greece dumping the euro is pretty clear. Even with the haircuts, it will still be impossible for it to pay its debts. At the same time, Greek workers need to cut their relative wages to be able to compete with the Germans.
An exit and a default would reduce the debt burden and enable the wage cuts to come from inflation and devaluation arguably a less painful process for the citizenry at least, than grinding deflation. The Greek central bank will also be able to take measures to boost the money supply.
However, in the case of the surplus countries, things are slightly different. If Greece, Portugal, Italy and Spain all stay in the euro, LSR thinks that 'Neuroland' will end up paying off their debts for them.
This means that the Dutch taxpayers will have to pay at least €19bn and as much as €39bn. In a worst-case scenario, long-term support may be needed even after the crisis is over. This would drive up costs further.
A Greek exit would also hit the Netherlands, says LSR. Why? Because the eurozone countries would still have to give it temporary assistance, which would be funded in part by the Dutch taxpayer. Meanwhile, bond market pressure on Italy, Spain and Portugal would increase further. This means either more subsidies, if they stayed in, or large bridging loans (if they stayed out).
Does the euro have any benefits?
LSR agrees that the euro has had some small benefits for the Netherlands. The reduction in transaction costs has boosted GDP by 0.3%, and trade has grown since 1998. However, they point out that a significant number of the country's new exports were imported semi-finished goods from China. The amount exported in terms of value-added goods remained the same relative to GDP.
The other apparent benefits turn out to be costs. Dutch surpluses generated by the euro were badly invested. Interest rate convergence allowed the peripheral countries to free ride on 'Neuroland''s reputation. Overall, LSR point out that from 2001 to 2010, the Dutch economy grew more slowly than the Swedish and Swiss who both decided not to join the euro.
This certainly sounds convincing but does it stack up?
A euro exit will have costs as well
The Dutch will clearly be paying for Greek profligacy if the euro remains completely intact. But it is unlikely that a swift return to the guilder will mean the Netherlands can cease all support. The northern countries that remain will argue that past membership requires contributions. If this fails, they could use legal loopholes to try to compel payments as they did in May 2010.
Dutch banks will also lobby hard for the Netherlands to keep helping Greece. As we've noted before, one of the reasons for the elaborate charade of the 'non-default' default, is to avoid write-downs of assets held by the creditor countries. According to the Bank for International Settlements, Dutch banks have exposure to $5.2bn-worth of sovereign Greek debt.
There is also the question of what happens to Dutch industry outside the euro. Although the guilder could (and should) shadow the single currency, the central bank is likely to let it appreciate. This would put industry in a much tougher position. The increase in real wages may also drive up imports, doing little for domestic firms.
Finally, the claim that the Netherlands' growth would have matched either Sweden's or Switzerland's if it had stayed out of the euro needs more evidence to back it up. Sweden is rich in timber and iron, while Switzerland benefits from being a financial safe haven. And neither the UK nor Denmark joined the euro, for example, but both grew slower than the Netherlands.
Overall, a Dutch exit from the euro is likely to be the best policy in the long run, for the same reason that it would suit most, if not all countries in the euro: having control over your own monetary policy makes it much easier to adjust to changing economic conditions.
However, in the short term, the benefits of an exit depend on the extent to which the Netherlands can evade any future support for the periphery. If they end up paying large sums anyway, they might as well stay in.
