Banks in Greece closed on Sunday. They opened again at midweek but only in an extremely limited way. For two days many account holders could not get any cash at all. Some people were rationing food, unable to get cash to buy food and with no assurance that money would be forthcoming for a week or longer. The logical response is to eat only a small fraction of the food that is already in the cupboard on any given day, regardless of how little that is. The scale of the humanitarian crisis was recognized internationally and some foreigners sent food to add to the relief effort already underway across the country. As of now, account holders are limited to cash withdrawals of €60 per day, more than enough to feed a family, but not necessarily enough money for much else. Daily withdrawal limits could be lowered, as there is not enough money still in the country to keep it fully operational.
On Sunday Greece votes in a referendum on the last IMF proposal. If approved the IMF plan would plunge Greece into a deeper depression than it is in already, with unemployment possibly going up to nearly 40 percent. But if the plan is not approved, the liquidity crisis in Greece will only get worse. There are no good choices in the referendum.
My guess is that Greece will vote no. In that case the government will have to arrange for some kind of quasi-currency so that it can pay workers and people can buy food. After so much money has been moved out of the country by nervous depositors and investors, there is no longer enough money in Greece to allow people to make everyday transactions. If voters vote yes, the situation is far more muddled. National elections would follow, and the new government would be obliged to go back into the same fruitless negotiations that brought Greece to where it is now. Neither result will provide any immediate relief to Greece’s banks, and both capital controls and quasi-currency will surely be necessary for more than two years.
Greece’s embattled prime minister has complained that European authorities want to humiliate Greece. This might have sounded like whining, but documents leaked from multiple sources this week confirm this view. European authorities are not concerned about what happens to Greece or whether it survives as a country so much as they are about the deterrent effect of their actions. They want to dissuade any other euro government that might be thinking of secretly borrowing excessive amounts the way governments in Greece previously did. If Germany and France can succeed in destroying Greece economically, then any other country thinking of following the same path would have great difficulty imagining that such a strategy would lead to a good outcome. Of course, a more effective deterrent would be if the guilty parties could be jailed and their individual property forfeited, but while that is probably within the reach of Greek law, Greece is too corrupt a country to contemplate anything of the kind. Instead, it is the prosecutors and reformers who have spent days in jail over the last five years.
It is one of the tragic flaws of a currency union that any country in it can find itself bleeding money the way Greece is now due to factors beyond the national government’s control. The natural tendency is for depositors to prefer keeping money in the financially stronger countries, but the result is that the stronger economies get stronger while the weaker economies get relatively weaker. This perverse dynamic of a currency union, which sees countries like Germany and the Netherlands grow economically at the expense of countries like Italy and Finland, will make the euro zone more and more unstable as time goes on unless someone can devise a way around it.
