In two articles published in Kathimerini on 12 February 2012, (a) Costas Meghir and (b) Michael Haliassos, Yannis Ioannides and Dimitri Vayanos argue that the incentives for the Eurozone to bail out Greece are waning as Italy is being shored up and a Greek default becomes containable. Greece should thus stop pretending it has any bargaining power, it should accept the latest bailout deal and should proceed with deep and carefully planned reforms.
Observing the negotiations of the Party Leaders who support the Greek coalition government with the Troika, with Mr Papademos as an intermediary, is a surreal experience: there is a pretense in the whole process that somehow there is an alternative to the abyss of bankruptcy and that somehow we can hold hostage the rest of the Eurozone and obtain an even better deal than the massive transfer they have already pledged. We need to understand that there is no real alternative: saving Greece is no longer an economic imperative for the Eurozone: it can survive a Greek default.
A Greek default used to be perceived as being of systemic importance; but now that Italy is being shored up and is undertaking serious reforms there is no reason to believe that the contagion from Greece to Italy cannot be stopped. If Greece continues to behave as if it can blackmail the Eurozone into ever larger and politically unacceptable transfers then the Eurozone will cross the current red line by allowing Greece to default, (and drop out of the Euro) and ordering the ECB to buy unlimited amounts of Italian debt at a yield of (say) 5.5% or above. Yes this will be a huge step towards European integration with a proper central bank, and yes the Germans with their exaggerated fear of hyperinflation want to avoid this. However, it is a step that European leaders will eventually prefer rather than being seen to make interminable transfers to a country that refuses basic reforms and believes it can blackmail Europe. And of course one reason they will prefer it is because it makes sense anyway to monetize some of the European debt burden. We need to understand that the only real alternative that our intransigence can bring about is Greece getting locked out from the international financial system for a long period of time. This will bring upon the country untold poverty and nasty social and political upheaval. This disaster does not need to be. As many of us have said lets turn the crisis into an opportunity: accept the deal, use the liquidity it will provide, and work hard on rebuilding Greek institutions and markets. Having lived off borrowed money we now need to build a sustainable and prosperous future.