Europe is playing a dangerous game:
A Game of Chicken, by Paul Krugman, Commentary, NY Times: On Wednesday, the European Central Bank announced that it would no longer accept Greek government debt as collateral for loans. This move, it turns out, was more symbolic than substantive. Still, the moment of truth is clearly approaching.
And it’s a moment of truth not just for Greece, but for the whole of Europe — and, in particular, for the central bank, which may soon have to decide whom it really works for.
Basically, the current situation may be summarized with the following... Germany is demanding that Greece keep trying to pay its debts in full by imposing incredibly harsh austerity. The implied threat if Greece refuses is that the central bank will cut off the support it gives to Greek banks, which is what Wednesday’s move sounded like but wasn’t. And that would wreak havoc with Greece’s already terrible economy.
Yet pulling the plug on Greece would pose enormous risks, not just to Europe’s economy, but to the whole European project... What we’re looking at here is, in short, a very dangerous confrontation. ..., how much more can Greece take? Clearly, it can’t pay the debt in full; that’s obvious to anyone who has done the math.
Unfortunately, German politicians have never explained the math to their constituents. Instead, they’ve taken the lazy path: moralizing about the irresponsibility of borrowers, declaring that debts must and will be paid in full, playing into stereotypes about shiftless southern Europeans. And now that the Greek electorate has finally declared that it can take no more, German officials just keep repeating the same old lines. ...
Furthermore, there’s still reason to hope that the European Central Bank will refuse to play along.
On Wednesday, the central bank made an announcement that sounded like severe punishment for Greece, but wasn’t, because it left the really important channel of support for Greek banks (Emergency Liquidity Assistance — don’t ask) in place. So it was more of a wake-up call than anything else, and arguably it was as much a wake-up call for Germany as it was for Greece.
And what if the Germans don’t wake up? In that case we can hope that the central bank takes a stand and declares that its proper role is to do all it can to safeguard Europe’s economy and democratic institutions — not to act as Germany’s debt collector. As I said, we’re rapidly approaching a moment of truth.