You can feel the heat being turned up on Europe. Greece is in the middle of what the Guardian has called a bank jog. In the 10 days since the elections which led to a political stalemate, a caretaker government, and new elections, Greek depositors have removed €3 billion from their banking system. It’s not like the banking system was super-secure before the May 6 elections, either.
This is a rational move for anyone with money in Greek banks looking at the prospect of an exit from the euro and return to the drachma. That will cause a large devaluation and a stripping of the value of those deposits. But this will facilitate a significant strain on the banking system:
Savers fear Greece leaving the eurozone and returning to the drachma. An aide to the outgoing prime minister, Lucas Papademos, said there were “serious fears that the banks were running out of money” [...]
A crucial €18bn cash injection to stabilise Greece’s banks has been held up at the European financial stability fund’s Greek offshoot, the Hellenic financial stability fund (HFSF), for nearly two weeks with officials in Brussels refusing to release the funds because of the political instability in the wake of the elections. That had still not been released by tonight and is now not expected to be released for another four days despite the efforts of the Papademos government to expedite the recapitalisation of Greek banks.
The delay to the recapitalisation was said to have forced the European Central Bank to stop dealing with some Greece banks, leaving local banks to receive funding from the central bank until the banks received their cash injection.
This has led to some significant scarcity, and Mario Draghi saying that Greece may have to leave the euro won’t help. The jog could easily become a bank run.
German Chancellor Angela Merkel, meanwhile, said yesterday that she could be open to stimulus in Greece. But she immediately contradicted herself:
Yet Merkel — who has championed austerity as a cure for Europe’s debt crisis and whose taxpayers are footing the biggest portion of the bailout here — was also quick to add that Greece must live up to its commitments to make tough economic changes and spending cuts in exchange for its $165 billion rescue.
“I have the will, the determination to keep Greece in the euro zone,” Merkel said in an interview with CNBC. “It would be good for all of us.”
She added, “If Greece believes that there is certain stimulus for growth to be pursued in the euro zone, we’re open to this.”
Any stimulus would be cancelled out by the spending cuts demanded in the bailout package. This is economics 101. And the happy talk of stimulus is also undercut by how European leaders, including the Germans, are clearly trying to influence the elections in Greece, slated for June 17.
Senior European leaders are attempting to turn Greece’s repeat national election next month into a referendum on the country’s membership of the euro, a high-stakes political gamble that officials believe can win back voters disillusioned by the tough bailout conditions but eager to stay in the single currency.
José Manuel Barroso, president of the European Commission, made the choice clear on Wednesday, telling Greek voters the €174bn rescue programme would not be changed and that remaining in the eurozone was now in their hands…
…“The next election is going to be a sort of referendum election,” said one eurozone finance minister. “We are going to convey very clearly to the Greek people that if there is no stable government to implement the conditions of the programme then we are going to have difficulties and are going to have to adopt plan B.”
This is a dangerous game the Eurozone leadership is playing. They cannot possibly believe that a Grexit would not cause a larger crisis throughout the Eurozone. We’re already seeing an early warning of what would happen. After Spain nationalized its troubled financial firm Bankia, they’ve been hit with a bank run, with over €1 removed in the past week. The stock is tanking on this news, even as Bankia tries to deny the reports. In the event of a Grexit, countries like Spain and Italy and Portugal would see this happen at their banks as a matter of routine.
I think you can make a case that this would be preferable to the status quo in the long term. As Atrios says, Europe is currently in the midst of a disaster and they have shown no aptitude to change course. British Prime Minister David Cameron is also correct when he says that “Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden sharing and supportive monetary policy across the eurozone or we are in uncharted territory which carries huge risks for everyone.” Those are, for the most part, the policy options not being taken at the moment.
But it’s no surprise at all that US politicians are eyeing Europe shakily, that the Federal Reserve has awoken to Eurozone risks, and that President Obama plans to pull aside Angela Merkel at the upcoming G8 summit and say, “I’m running for office, for Pete’s sake, come up with a growth strategy so your continent doesn’t melt down!”