Jamie Galbraith has been working with Yannis Varoufakis for some time now on Greece, Greek problems and what really should be done. I think it would be fair to say that Galbraith and myself have very different views of the world and the economy. But he has a piece today talking about the myths of the story that Americans need to get right, rather than just accepting the prevailing tales floating around. It's possible to argue with all of them but instead I want to point to just one. Galbraith is entirely correct that no one in Europe has the power to throw Greece out of either the eurozone or the European Union. There is in fact no legal process at all to leave the euro and the one to leave the EU takes two years at a minimum.
So, Galbraith is technically correct in this statement:
As soon as Greek
Prime Minister Alexis Tsipras announced the referendum, François Hollande, David Cameron, Matteo Renzi, and the German Deputy Chancellor Sigmar Gabriel told the Greeks that a “no” vote would amount to Greece leaving the Euro. Jean-Claude Juncker, President of the European Commission, went further: he said “no” means leaving the European Union. In fact the Greek government has stated many times that – yes or no – it is irrevocably committed to the Union and the Euro. And legally, according to the treaties, Greece cannot be expelled from either.
Entirely so. It doesn't matter how annoyed Hollande, Merkel, Juncker, and if we want to extend the list to some of the other European Presidents (would you believe there are five of them?) we can add Tusk, Draghi and Schultz, get with Greece, Tsipras or Syriza. There is no legal mechanism to throw Greece out of either the euro or the EU.
However, while that is technically true it's entire nonsense in a practical sense. Not about the EU itself: there isn't any manner at all that Greece can be thrown out. But the euro and the eurozone, it is possible to make absolutely certain that Greece would leave it without actually throwing it out. All that has to happen is that the European Central Bank decides to stop supporting the Greek banks and their liquidity problems through the Emergency Lending Assistance (ELA) program.
The background is this: you must have a banking system in order to have anything approaching a modern economy. Yes, yes, I know, we all shout about Wall Street and all that but we simply must have banks, their money transmission systems and (to a lesser extent) their maturity transformation in order to have an economy anything above subsistence and barter.
The Greek banking system is at minimum illiquid (probably insolvent but that's not important for this argument). The solution to which is provision of liquidity by the central bank. That's what the ELA is. Greece does not have its own central bank, it is reliant upon the ECB. And more, Greece cannot create euros to provide the liquidity to the banks if the ECB should decline to do so.
So, what would happen if the ECB withdrew that liquidity? The banks would collapse and no economy above barter and subsistence would be possible. In fact, what is going to happen next week? The banks will reopen (we are told), there will be a rush to get the money out and the ECB then has to decide whether to increase the ELA or not. The betting is that it won't: at which point the Greek banks crash and burn again.
The only way for Greece to avoid having smouldering ruins where they used to have a banking system is to recapitalise those banks. But they don't have the euros to do so nor the ability to create them. They would thus have to do it by inventing a new currency. Whether we call it IOUs, a parallel currency or the new drachma doesn't matter. Greece is at this point out of the euro (if for no other reason then Gresham's Law, bad money drives out good).
Galbraith is absolutely correct that there's no law that says "If Greece does this and this then we can throw it out of the euro." There's not even a law that provides any structure at all to how a country could even leave the euro. But there's cold hard reality which could lead to Greece having to leave the euro whatever the law says.
If the ECB withdraws, or if the banks reopen even limits, the ELA then Greece will have to leave. And there's no point in leaping up and down about how the ECB must, by law, back the banks. That would take some years to wend its way through the court system and what is going to happen won't take longer than a couple of weeks.
The banks cannot stay closed longer than that. Thus the decision will be the ECB's to take. Support the banks or not? And legally, if the ECB thinks that the Greek banks are insolvent (which they would be if the Greek government were declared to be properly in default, as seems pretty likely soon enough) then the law says that the ECB cannot continue with the ELA.
So, Galbraith is right, technically, about the law. But wrong about reality. It would be the work of moments (OK, might take some time to convince the ECB, but once done it would take moments to do the act) for Europe, the troika, to force Greece out of the euro. Cut off the banks and Greece becomes a barter economy or brings in the new drachma. The latter won't be pretty or a happy time but it would be a lot more fun than the absence of a banking system. Thus that is what would happen.
