Cullen Roche of Pragmatic Capitalism has a good post up on Greece this morning. Basically I agree up until his forecast.

He thinks Greece will stay in the Euro and suffer the consequences because European integration is inevitable. When I read statements like that, I think of the Norman Angell’s 1910 book, “The Great Illusion,” which forecast an Awesome 20th century for Europe, because countries that trade with one another as much as European nations did back then never make war on one another.


In short, just because something is rational, doesn’t mean that emotional, stubborn human beings won’t make a wrong or stupid choice.

This situation is playing out almost exactly as I expected at its start. Both sides have every interest in staking out maximalist demands at the start, and not significantly compromising until the very last moment. But ultimately, it is a question of human choices, and they may or may not make rational sense.

Ultimately there were only two critical unknowns in the scenario:
1. would Greece have the guts to actually walk out on the Euro?
2. if so, how would the rest of the EMU react to Greece walking out on the Euro?

Why are those the two critical points? Because up until (1), Europe has all the power. But if Greece actually does (1), then Greece has all the power.

Before that point, inevitably someone had to blink first. The only question was, who would blink first. That has been answered: Greece.

Next, how would the other side react? With compromise (rational), or with a boot crushing the adversary’s face in the mud (emotional)? It sounds like we have the answer to this as well. Kaiser Wilhelm of 1914, meet Herr Schauble of 2015. But, of course, a brilliant move – so long as Greece doesn’t have the guts to walk out on the Euro.

So it looks like we are rapidly coming up to the point of getting an answer on the first critical unknown. Up until now, Herr Schauble et al could have great confidence, since the polls indicated Greeks wanted debt relief. But by a huge margin, the also wanted to stay in the Euro. And a pony.

Well, the most recent polls show a marked increase in Greeks willing to leave the Euro. If Tsipras has played his cards in such a manner as to make sure he is not blamed for leaving the Euro by, say, 40% or more Greeks, he can actually go through with (1).

But it is a human decision. Just as the reaction by the rest of Europe will be a human decision if he does so. Europe will surely let out a collective gasp of shocked disbelief. And then it will either compromise, or it won’t.

Unlike Roche, I do not think continued European integration is inevitable.

There is a structural medium term compromise which can be implemented, if Europe is willing to acknowledge that the Eurozone, in its present state, is flawed.

That compromise is the three R’s: Resignation, Restructuring, and Re-entry

Resignation: the peripheral Euro states are allowed to resign from the Euro, on a temporary basis, in order to devalue.

Restructuring: the peripheral zone states then restructure their tax and/or welfare systems to bring them into balance (either California with California-style benefits, or Mississippi with Mississippi-style benefits, or anywhere in between, but not Mississippi with California-style benefits.)

Re-entry: the restructured states re-enter the Euro at a more neutral value.

If the program is agreed up front, then it is a decent coping mechanism. Or else the Europeans find out that indeed integration can work in reverse.

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