17 Jan 2015

Man the Euro lifeboats – but not the Greeks

The liner is sinking and after some delay the captain orders: launch the lifeboats. But, he says, the first, second and steerage class must each travel in separate lifeboats. If the lifeboats take on water, the passengers are instructed not to help each other, since this would violate the principles of the ship – which is no solidarity between the passengers whatsoever.

Sound familiar? It is, essentially, what’s about to happen in the Eurozone, and the steerage passengers are 11 million Greeks.

There are credible reports that the European Central Bank’s long awaited programme of quantitative easing will be announced on Thursday – but with a sting in the tail. The ECB will, according to the Financial Times, force national central banks in the Eurozone to assume all the risk inherent in the project, and probably exclude Greece.

To explain, quantitative easing involves a central bank creating money and then using it to buy up long term debts: both the debts of countries and things like mortgage debts. This makes money for banks ultra cheap and eventually forces investors to move money into riskier assets – trickling over like the proverbial champagne fountain until it reaches the ordinary Joe, having first filled the goblets of the rich until they runneth over.


But QE as practised by all other countries involves a sovereign central bank managing a unified currency: the Yen, the dollar, the pound. The reason the Germans resisted the ECB printing money is that it would effectively have raised the possibility of transferring risks from one country to another.

Though QE is a monetary measure – aimed at easing credit – because it buys government bonds it effectively becomes a fiscal measure – even when carried out in a single country.

Carried out in the Eurozone, with 19 different tax and spend regimes, it would always have involved risk transfers between countries.

So this design for EuroQE makes sense – but only if you are putting the absolute avoidance of risk transfer, also known as European solidarity, above reviving the whole continent’s economy.

By doing QE on a country by country basis, the ECB is effectively admitting it cannot muster trans-European solidarity; in effect it cannot and will not do “anything it takes”.

Pessimists will see this as a pre-emptive design for the least-chaotic breakup of the Euro. And it is not just a technical issue.

If Greece can only do QE by buying Greek bonds, then Greece is effectively frozen out of QE. Some Greek debts are, whatever happens in the election next Sunday, set to be rescheduled or written off. So there’s no point buying them as the central bank would inevitably lose money.

The move will massively ramp up pressure on Greece: coming on top of the revelation that two Greek banks are trying to get emergency assistance from the ECB, it puts even more power in the hands of the ECB over Greek policy.

However, Greece itself now faces tough decisions. If the ECB refuses to support the Greek banks, and if the ECB tries to exclude Greece from the QE programme, that would seem to many in Greece like the opening shot of an attempt to force Greece out of the Eurozone.

With the election under way it places pressure not just on the far left Syriza party – which is the front runner – but paradoxically on all the parties that have been created to try and revive the political centre and centre left.


No Greek government could easily sell to its people a unilateral exclusion from the biggest stimulus programme the Eurozone has ever seen. And remember, until the election produces a 151 seat majority in the Greek parliament, this exclusion, and the bank troubles, are the problem of the existing ministers, not the far left.

If the election turns into a straight “confront the ECB or give in” fight, then the centre right will have no trouble giving in, but the rising, small centre left parties, To Potami and To Kinima, formed by ex-premiere George Papandreou, cannot sign up to surrender.

Though these are highly technical issues, most Greeks who read the newspapers will, by Monday, be able to understand the basics: the Eurozone is preparing to cut Greece adrift from the stimulus package that is supposed to save the currency. For all the assurances from politicians that they will not promote “Grexit” it looks like the ECB is prepared to.

Support for Euro membership is high in Greece at 70 per cent.  But it is fragile. We may be about to find out how fragile.

If the left wins next Sunday, and inevitably appoints a new boss of the Greek central bank, then that will become the most critical job in European policy. The governor of the Bank of Greece will have to manage the survival of its stressed banks, stem any capital flight, and then go to Frankfurt and do something no Eurozone central bank has ever done: actually fight the ECB.

Though Greece is an outlier, other peripheral governments and their central banks will watch very carefully how Draghi handles this.