Greek politicians have once again let their country down and we are now headed for new Greek elections by mid-June. A highly volatile couple of weeks are in store, since the elections are sure to serve as a referendum on Greek membership of the euro. On one side will be the euro area and the two traditional mainstream parties in Greece, the Socialists (PASOK) and New Democracy, advocating that Greece stick with the austerity program imposed by the International Monetary Fund (IMF) and the euro area leaders, warning that failure to adhere will force a euro area exit. On the other side, the populist parties led by Alexis Tsipras and Syriza will argue—fallaciously—that the International Monetary Fund (IMF) austerity can be avoided even as Greece remains inside the euro.
The hard liner Wolfgang Schäuble, Germany’s finance minister, was explicit again on Tuesday, saying: “If Greece—and this is the will of the great majority—wants to stay in the euro, then they have to accept the conditions. Otherwise it isn’t possible. No responsible candidate can hide that from the electorate.” German Chancellor Angela Merkel and the new French president, Francois Hollande, were more diplomatic after their first meeting in Berlin, stating that they wanted Greece to remain in the euro area, and that Europe would work to promote economic growth. But they also made clear that the Greek government would have to stick with the agreed IMF program. Even after Hollande’s victory, there was not much sunlight between France and Germany.
Despite the clarity of their warnings, polls in Greece suggest a mixture of wishful thinking and schizophrenia. Voters seem to be flocking to Syriza’s anti-IMF electoral platform while expressing the desire to remain in the euro area. Something will have to give.
As I have described earlier, the new elections take euro area crisis brinkmanship to a new level. But whether euro area leaders succeed in bludgeoning Greek voters into backing the pro-IMF program parties is an open question.
The threats are already producing real economic effects in a way that past warnings to voters in Ireland and Denmark, when they initially rejected a European Union in referendums, did not. The latest threats may not be swaying Greek voters, but they are already swaying Greek bank depositors, who have been withdrawing their bank deposits at an accelerating pace. Indeed, we may not even see Greek elections if Greek bank depositors deliver their own verdict on leaving the euro area before mid-June.
Normally, of course, a bank run is a devastating event. Responsible policymakers do their utmost to avoid one. But an accelerating bank run in Greece might offer opportunities. A bank crisis will likely strengthen the hand of pro-IMF program parties. We should thus expect no letup in the threats from the euro area leadership. Indeed, these leaders may secretly encourage the bank panic as a strategy to expose the hollowness and deceit of the Syriza electoral platform. If Greek bank depositors do not trust Alexis Tsipras’s promises with their own money, would they vote for him?
It is counterintuitive, perhaps, but anyone who wants to keep Greece in the euro area should withdraw money from the banks. Though pro-IMF program politicians will likely keep quiet, PASOK and New Democracy might actually encourage the bank runs. They could even post the lines outside banks on YouTube to send the message!
Make no mistake. This high stakes game of chicken could bring unknown and potentially uncontrollable consequences, possibly leading to an economic collapse in Greece, which could spread to other euro area countries. As I have argued before, euro area leaders should choose this route only if they are prepared to adopt a pan-European bank deposit insurance scheme and have the European Central Bank (ECB) resume massive market intervention if things go wrong.
But the potential benefits from this gamble are also huge. A bank run led by retail depositors—after all, no one really knows how a country technically leaves the euro!—might vindicate the pro-IMF program parties and quell Greek protests against austerity and their flirtation with Tsipras’s populism.
The euro area could then consider several alternative strategies to get a compliant government in Athens. The Greek president could reconvene political leaders to try to salvage the situation, with PASOK and New Democracy seeking several of the previously opposed parties to form a new unity government. These could include the Democratic Left led by Fotis Kouvelis and/or the Independent Greeks led by Panos Kammenos. It might not be strictly constitutional to cancel an election once it has been called, but a legal route could be found if the president and a majority of Greek parliamentarians wanted it.
If the deposit flight continues unabated, the ECB will be in an awkward position, because it will likely be called upon to provide capital to Greek banks to make up for lost deposits. Presumably the ECB would do so only with a mandate from euro area political leaders, perhaps including explicit euro area sovereign guarantees to continue to lend to Greek banks or allow Bank of Greece Emergency Liquidity Assistance (ELA) to continue. Such a demand would echo what the central bank did when it was forced to accept default-rated Greek bonds after the restructuring in March. As Belgian central bank president Luc Coene said this week: “The issue is one for the politicians.... It will be a political issue—where is the balance of solidarity—rather than a technical issue about whether the banks have been sufficiently recapitalized or not.” The ECB would of course not want to be seen as pushing Greece, leaving that role to elected politicians.
Euro area leaders would then have to decide what to do. They would probably not want to see the Greek banking system collapse immediately, so they would likely go along with the ECB lending money to Greek banks. But they would probably also demand that Greek politicians sign up to the IMF program, or even that they scrap the elections and form a unity or technocratic government. This may seem terribly undemocratic. Such demands would have to be packaged to make them look like the idea came from Greece. But such things have happened before. Only last November, the EU pushed for the installation of technocrats to run the governments of Greece and Italy. Despite the claim by Merkel and Hollande that they would “listen to the Greek people,” Greek bank depositors may speak louder than Greek voters. If a bank run presented an opportunity to win a Greek agreement to stick with the IMF program, European leaders would almost certainly seize it.
More broadly, a devastating domestic bank run in Greece could strengthen the case for keeping the euro area together while it heads toward a fiscal and banking union. Euro area leaders in Germany, France, and elsewhere know that a euro exit by a member state would be very costly throughout the currency region, making them vulnerable to blackmail from opportunistic populists like Alexis Tsipras in Greece. But now the example of Greece has illustrated a new factor—namely, that the threat of a bank run taking place in any country considering a euro exit acts like the functional equivalent of a preemptive nuclear strike on political forces advocating such an exit. Because of the Greek example, populists across the euro area have awakened to a new political reality—that will be blamed for destructive domestic bank run if they pursue their exit strategies.
By bringing forward the economic costs of a euro area exit to the present—before any voters back a euro exit in their country—a bank run in Greece will not only help produce the “right result” in that country (i.e., a pro-IMF program majority), but prevent such policies from even being articulated by populist leaders elsewhere. Such political neutralization of populism would be a huge prize for euro area leaders.
Utilizing the threat of bank runs does take euro area brinkmanship to a dangerous new level. Euro area leaders should think carefully about proceeding down this road. It should only be contemplated if euro area leaders are willing to proceed to pan-euro area bank deposit insurance and other dramatic integration measures to avoid the spread of contagion and bank runs to other member states. If they are prepared to do so, they can call Alexis Tsipras’ bluff by fomenting a bank run in Greece before the new elections are held.