What follows is the core of Richard's e-mail (sent 15/5/12 as the new French President was on his way to Berlin):
Well, after the calm early in the year, it looks like we have an end game.
But for how long and where will it go? Greece is the domino/the straw that might break the camel's back. But the real end game is further West; primarily Spain but it could get very unpredictable. In 1989 we belatedly realised huge change was coming in the East but no one foresaw the end game, let alone how far it went. The collapse of the Soviet Union was actually brought about by Russia which decided to leave. Within a few short years half of Eastern Europe was in the EU, one of the many unthinkable changes even as the Velvet Revolution unfolded.
I think we have entered a similar era of unpredictability. Some pointers:
- Greece obviously ever more unstable: if Syriza win the new election, I cannot see EU bending enough to keep Greece in the Euro.
- Greece also probably has an independent get out through Russia. Out of the Euro, cheap currency and lots of Russian help. Got to be a strategic opportunity for Putin and there are historical/religious links. Unlike Eastern Europe, Cyprus has never had antipathy to Russia. Without being an expert, Greece is presumably no different as its historical suffering has been at the hands of the Turks and, in WWII, the Germans;
- If the EU does bend, the rest of the PIIGS will be after softer terms. Whilst there is a strong case for the right sort of stimulus, it has got to be done within a debt reduction framework to be credible. It is increasingly unlikely that that circle can be squared within the Euro. Such a stimulus is probably only workable with a flexible currency that is not anchored by Germany;
- The EU seems to think it now has a sufficiently strong firewall to contain a Greek exit. I am dubious;
- Even if the firewall does prove stronger than most think, it does not change the question back from "when" to "if." Even if prolonged austerity did deliver a fit Spain, etc., to compete with Germany (a very big if), how much longer will Spain, etc., be prepared to put up with it? A collapse/diminution of the Euro beyond Greece has to remain a question of "when" not "if". And what will further delay do other than prolong recession in the north and depression in the south? As soon as there is a general conclusion that it is a "when" not an "if", a tipping point is reached and "when" is likely to happen quickly.
I was also concerned to hear Simon Johnson, former IMF Chief Economist, likening the Euro to the Titanic. He said Greece is just the tip the iceberg but really the Euro has already been holed below the waterline. Unfortunately, the Germans, the EU Commission and the ECB are on the bridge sailing on regardless, with no idea of the gaping hole below! A little trimming here and a change of direction there won't fix that.
To put it mildly, the message here is somewhat apocalyptic, but that doesn't mean it's wrong. Even Christine Lagarde of the IMF has acknowledged that a Greek exit from the Euro, while undesirable, is now to be regarded as a distinct possibility - and she noted that it would be a 'messy affair', which I suspect is IMF-speak for 'a complete shambles'! Hopefully our leaders, including here at home in the UK, are thinking hard both about how to mitigate any economic damage that will result from a possible Greek exit from the Euro, as well as about the quite complex political ramifications.