Mistakenly, they have convinced themselves that it won't much matter if Greece leaves, and indeed that it might even help resolve the wider crisis to get rid of this persistent thorn in the flesh.
Bring it on, they mutter callously; it will be a lot worse for them than for us. On one level, this is just bravado. It's an attempt to put as nonchalant a face as possible on the now apparently inevitable. But they also seem to believe in their validity of their own analysis – that they have indeed used the past two years well, and are now fully prepared for a Greek exit.
Believe it if you will. The ineptitude to date of the eurozone's crisis response strongly suggests a different conclusion – both that the likely contagion from an exit has been hugely underestimated, and that by prompting a wider breakup, thereby tipping Europe into depression, it may end up as bad for everyone else as it is for Greece.
The Greek problem has been consistently misdiagnosed and mismanaged right from the start. First there was the suggestion a year ago from Angela Merkel and Nicolas Sarkozy that if Greece didn't buckle under and agree austerity it might be chucked out. Markets reacted logically by selling bonds in any country that looked vulnerable, thereby making it much harder for all periphery governments to fund themselves.
This disastrous admission was compounded by attempts to underpin confidence in the financial system by forcing banks to mark their sovereign debt to market. This destroyed the concept of the "risk free asset", forcing banks for the first time to apply capital to their sovereign debt exposures. Unsurprisingly, they stopped buying sovereign bonds in the distressed countries, again making it harder for governments to fund themselves.
These mistakes were partially reversed by the European Central Bank's LTRO programme, which provided banks with the liquidity they need to resume purchases of sovereign bonds. Unfortunately, this has only succeeded in creating its own problems. The completely inappropriate austerity of Europe's Fiscalpakt has sparked new doubts about debt sustainability, which has in turn further undermined confidence in bank balance sheets now stuffed to the gunnels with sovereign debt.
And they expect us to believe that a Greek exit can be managed without further cost? Let's just briefly deconstruct the increasingly desperate position that Greece finds itself in. Greeks have voted to reject austerity but remain in the euro. They won't be allowed both.
If they don't continue with the programme, they'll be denied the remainder of the bail-out money. Unable to pay wages, pensions, healthcare costs and bills, government will quickly grind to a halt. The state could theoretically force the banks to buy its bonds, but the ECB would soon in such circumstances refuse further funding. At that stage Greece would have no option but to return to the drachma.
Hyperinflation would replace grinding deflation. The effect on living standards would be equally catastrophic. It's true that properly managed, leaving the euro does in the long term have the potential to return Greece to competitiveness and growth.
But does anyone believe Greece capable of managing such a transition well given the positively heroic scale of mismanagement to date? And is it in any case possible to have a well managed exit for a country that doesn't want to leave? In or out, the outlook for Greece looks bleak.
It scarcely looks a great deal more appetising for the rest of Europe. Banking exposure to Greece has been minimised, so in theory the consequences for the rest of Europe's banks shouldn't be so bad. Instead, Greece's bad debts have been socialised by a combination of the European Financial Stability Facility (EFSF), the IMF and the European Central Bank's Target 2 liquidity support.
If Greece redominates all its debts in cut price drachmas, the ECB and its backers – in particular the German Bundesbank – will take a terrible hit, but it won't be terminal. The Bundesbank would most likely simply write off its Target 2 lending to Greece, which would certainly be a major curiosity given its abhorrence of debt monetisation but wouldn't of itself destroy either the Bundesbank or the euro.
The threat comes instead from market contagion to other eurozone countries worst hit by the debt crisis. To Germany, Greece has always been a special case, a nation which cheated its way into the euro, whose citizens are lazy and won't pay their taxes, and is in any case basically ungovernable. There is a very different attitude to Spain and Italy. Germany's determination to make the rest of the eurozone work should not be underestimated.
The trouble is that once one has left, and the principle has been established that it is indeed possible to leave the euro, it's going to be tough to impossible to contain the crippling capital flight which is certain to set in elsewhere. Greece is just the canary in the mineshaft, an outrider for the much wider problem of imbalances and divergent competitiveness.
Time is running out. There's little doubt where Francois Hollande finds himself in Churchill's famous dictum that Germany is either at your throat or at your feet. On his first day as President of France, he's off like a poodle to Berlin for crisis talks. Can he persuade Angela Merkel of some kind of cunning, alternative plan? Does he even have one? Now why does this seem so unlikely? What a mess.
The Telegraph
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