Greece and Germany Are Both Bluffing

A blog about business and economics.
May 10 2012 1:57 PM

Greek Standoff

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Leader of the Socialists PASOK party Evangelos Venizelos makes statements to the press on May 10, 2012 at the Greek parliament in Athens.

Photo by LOUISA GOULIAMAKI/AFP/GettyImages

The problems of Greece are not typical of the problems of the Eurozone as a whole. Greece is a story of chronic budget deficits, inability to collect taxes, and systematic cooking of the budgetary books. And in Greece, unlike in the rest of the continent, fiscal problems really did lead to banking and growth problems rather than resulting from them. But little Greece has once again put itself right at the heart of the crisis. And the crux of the matter is this:

Angela Merkel's hesitancy to give Greece a more generous bailout is not credible. If Greece exits the euro, then Germany will be forced to either engage in much more expensive bailouts of larger countries or else to witness the total unraveling of the Eurozone. And if Merkel wanted the Eurozone to unravel she could just leave. At the end of the day, her dominant option is to just send the money over.

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Greek hesitancy to just accept what Germany is willing to give and make do with it is not credible. If Greece exits the euro, then not only will their domestic banking system be destroyed, they'll be getting zero German money. The austerity that hails down as a result will be much more severe than what they're going through now, and Greece isn't even especially well situated to take advantage of currency devaluation, since its key shipping export industry isn't that kind of thing. At the end of the day, Greece's dominant option is to just take the money and make do.

The problem is that this gives everyone incentives to bluff. So Greece goes and votes a bunch of fascists and communists into office just to show that, yes, it's perfectly possible that something crazy will happen. Meanwhile, Merkel's government is putting out word that maybe the Eurozone could survive a Greek exit just fine.

This kind of bluffing behavior is very understandable, but it's also very dangerous and the odds are always very good that you're going to wind up in a situation nobody wanted.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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