The end of the euro: how the Greek stand-off could trigger it

With the EU no closer to a compromise on Greek debt, Greece is looking ever closer to leaving the eurozone. John Stepek looks at the worst case scenario.


Wolfgang Schuble and Yanis Varoufakis: Germany and Greece are in no mood to compromise

Europe's finance ministers had a chat yesterday about Greece. You might have heard about it. Didn't go too well, by the sounds of things.

They hadn't expected to come to any deal over Greece's debt problems. But they had hoped they could agree a bit of an agenda for future talks at least (the next session is on Monday).

But it turns out they couldn't even do that they still can't "even agree to disagree", as the Greek finance minister Yanis Varoufakis put it a couple of days ago.

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If this carries on, we could be looking at a Grexit' as early as March so what would that mean?

It's a bit late to be going on about moral hazard now

I have a certain amount of sympathy for Germany. Their voters were conned into joining the euro just as much as everyone else's. Yet they're now being painted as the bad guys because they're reluctant to subsidise voters in a different country.

But an opinion piece in the FT this morning from Jurgen Stark, a former representative of Germany on the European Central Bank's board, goes a long way to diluting that sympathy.

Assuming the piece reflects his views fairly, it demonstrates a rigidity of thought, dismissal of political reality and downright orneriness that must have made dealing with the guy a nightmare.

Stark trots out the usual stuff about how it's not Germany's fault that Greece is a corrupt state that lived beyond its means. Europe is not politically integrated yet, he says, so there is "no constitutional basis for a higher level of transfer payments to weaker countries. Such payments anyway do not solve economic problems and they lead to moral hazard."

Now, I worry about moral hazard as much as the next person probably more, in fact. Economics is ultimately all about incentives, after all.

But the entire euro project is founded on moral hazard. Greece (and most of the others) joined partly so that they could borrow at German interest rates. Anyone who says they didn't see that going in is either lying or being deliberately obtuse.

So you can't now throw up your hands and say: "Nothing to do with us, guv I didn't realise this was going to happen." At least, not if you want this silly, anti-democratic economic experiment to survive.

If Greece leaves, what's the worst-case scenario?

what I discussed here the other day

So let's assume the chat on Monday doesn't go any better than yesterday's. What happens?

The basic issue is this: if Greece has all of its lifelines cut off by Europe which will happen by the end of the month if they don't come to some sort of agreement its banks will be unable to function. That would force it to leave the eurozone.

What investment bank UBS worries about is that this fear could then spread to other European countries. UBS points out that there are two issues for other nations: will the eurozone stand behind their banking system? And regardless of the answer to that do bank depositors believe their country will leave the euro?

As UBS puts it: if you think there's even a 5% chance of your country leaving the euro, it's irrational to keep your savings there. They suggest that a return to the drachma would see the value of converted savings drop by 60%, for example. That's the most extreme example, but I can't see the rebooted peseta or escudo being much more sturdy in the first instance.

In effect, you've got what started to happen in Scotland ahead of the independence referendum a silent bank run, where savers who were worried about potentially having their savings converted into a weaker currency started pulling money out of the banking system.

That then ends up being self-fulfilling, tipping countries into a crisis that Europe doesn't have the political will or mechanisms to deal with.

And, as we've said before, if one of the biggies leaves Spain or Italy it could spellthe end of the euro.

I'll say again I do think this is a worst-case scenario. Maybe I'm being complacent, but I still think that while a Greek exit would be a jolt, there are still plenty of options open to neutralise the worst of the knock-on impact.

But just in case, we've taken a look at ways you can insulate your portfolio against Grexit and various other doomsday scenarios in the latest issue of MoneyWeek magazine, out tomorrow. If you're not already a subscriber, get your first four issues free here.

And if you're less optimistic than I am, do have a look at my colleague Tim Price's report on Europe and the risks a break-up poses to the UK it's all here.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.