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Why Greece Won’t Leave the Euro

Earlier this year Yanis Varoufakis, the incoming Finance Minister of Greece stated his position on Greece’s Euro membership clearly:

“If it is in my power to determine…Greece will neither want to leave the euro nor threaten to do so. We should not have entered the euro – this is crystal clear, but once in, it is disastrous to remove one’s-self from the Eurozone voluntarily.”

Yanis is probably right that they shouldn’t have entered the Euro under the terms of the Lisbon Treaty as it stood. But their membership in some form of a Euro currency system was likely inevitable. Geographically, the region has simply become too intertwined to have so many currency systems and national banks. The convergence of these institutions and financial systems was inevitable. And the hyperglobalization of the world is only going to make these relationships increasingly intertwined. But there’s another reason why Greece won’t be leaving the Euro any time soon – Germany won’t let it happen.

This intertwined relationship between the European countries has obviously created huge economic problems for the peripheral countries in particular. And it has largely benefited Germany, the dominant current account surplus country. And so Germany has been fast to maintain the Euro as it is. Β Of course, being the dominant banking system in the region Germany also had the most to lose if the Euro collapsed. In addition to widespread defaults, defections would result in collapsing competitiveness for the Germany currency relative to everyone who leaves. The Germans have been very smart about keeping all of this together so far. They know they are the economy with the most to lose if things collapse.

But the cost of keeping it all together has only increased over the last 5 years. The IFO Institut estimates that a collapse of the Euro could cost Germany upwards of €350 billion (about $400 billion):

For the (fictional) case of a collapse of the euro

Loss of Germany to the collapse of the euro and the insolvency
of GIPSIZ countries on the basis of previously disbursed grants
Billion euros
TARGET receivables
Receivables from issuance of banknotes
ECB purchases of government bonds
disbursed financial aid to Greece
disbursed grants to Portugal
disbursed grants to Ireland
disbursed grants to Cyprus
disbursed grants to Spain

Germany had a lot to lose before they started investing in the bailouts of their neighbors. And the potential losses have only grown over the course of the last 5 years. The Germans aren’t stupid. They know that the future of Europe involves some form of unification. And no matter how difficult it might be in the near-term they know that the long-term losses are potentially dramatic if they can’t hold things together in the near-term. And that’s why Greece won’t be leaving the Euro any time soon. Germany will bend over backwards at this point to make sure it doesn’t happen.