Just over a month ago, I wrote a post entitled ‘Why I can still believe the euro will survive, just’. This was not based on any forecast of the Greek elections, but rather a judgement about the balance of power within the Eurozone. (It is also based, as Paul Krugman points out, on the optimistic belief that the actors concerned recognise this shifting balance.) The talk at the time was all about how Greece would ‘have to’ leave if they tried to renegotiate their loans. I thought this was not a credible threat, because other Eurozone countries (including but not just Germany) had at least as much to lose as Greece if such an outcome came to pass. Satyajit Das describes the potential losses for Germany here.
I think the outcome of the recent summit is consistent with that view. Charles Wyplosz is right that it does not represent a sea-change, but the hard line position that Germany had taken has begun to crumble. In part this is because other major countries (Italy, France) have, perhaps for the first time, aggressively argued against that line, but I also think that Germany is beginning to realise how weak its position is. Change will be slow, if only because German public opinion has also to recognise its objective position, rather than staying comfortable on some imagined moral high ground. (For German attitudes on Greece, see here, and for hard line attitudes to banking union, here: HT MT). The problem, as Paul Seabright eloquently points out, is in seeing this as a one sided moral issue, which is why I wrote my – admittedly also one sided – alternative moral tale. For a much more reasonable and interesting discussion between a German (Kantoos) and Greek (Yanis Varoufakis) economist, follow this link. Here is just one aspect that contributes to the weakening position of creditor countries like Germany within the Eurozone.