Europe, through the looking glass

By R.A. | WASHINGTON

MANY people have been linking to this Spiegel piece, on how the Germans are preparing for the possibility of a Greek default. It's a remarkable read. Consider:

The rest of Europe is losing patience with Athens. And after 18 months of crisis in the country, there is still no improvement in sight. Key economic figures are worsening, and there are growing doubts over whether the Greek government truly understands how serious the situation is.

If this is the way most Germans view the situation in Greece, Europe really is doomed. Greece has not shied away from austerity. There is perhaps more to be cut, but the Greek government already faces regular civil discontent over the wrenching budget moves it's adopted over the past year. Meanwhile, the Greek economy shrank 7.3% in the year to the second quarter. Its banks are being bled dry in a slow-motion run on the country's financial system. Trust me, if there's anyone in Europe who understands how serious the situation is, it's the Greeks.

The Germans, on the other hand, seem to be in complete denial. German leaders are pushing for more, rather than less, austerity, despite the damage severe cuts are inflicting on the economy. They're not too fond of greater fiscal integration, which would relieve pressure on the struggling periphery, nor are they interested in broader ECB bond purchases or an appropriately loose monetary policy. The Germans are keen on nagging southern Europe to boost its competitiveness, but they don't seem anxious to give up their persistent trade surplus. Having placed Greece in an impossible economic situation, the Germans are now ready to give up on the Greek economy entirely:

Schäuble hopes to allay their fears. He argues that Greece, unlike the other crisis-hit countries, is a hopeless case. Or, as Greek Minister for Regional Development and Competitiveness Michalis Chrysohoidis told the Berlin newspaper Tagesspiegel: "The Greek economy is dying."

He has a point. More and more companies are filing for bankruptcy, and Greece's austerity program is already hopelessly behind schedule, in terms of both the sale of government property and the agreed reforms. "It's like dealing with children that constantly have to be told to clean up their rooms," complained one member of the delegation. The troika members from Europe were particularly incensed, while the IMF representatives were more tolerant. Nevertheless, everyone is irritated over the lack of progress.

Yes, it is irritating, isn't it?

I've already mused that maybe the euro crisis is primarily about negotiation over the distribution of the costs of saving the currency area, or that maybe it's about figuring out which euro zone membership club is consistent with the political will to keep itself together. There's still another possibility, however. Maybe core economies have convinced themselves that Greece's economy has fundamental weaknesses that are dooming rescue efforts and undermining confidence, such that if the euro zone ejects Greece all problems will be fixed. That would be a dangerous mistake to make; A Greek departure would have serious ramifications across the euro zone, and it would not solve the inherent weakness of the currency area. The situation would almost certainly deteriorate, unless a Greek departure were combined with a major initiative to shore up the rest of the euro zone itself, which obviously wouldn't be forthcoming in a Europe convinced that the big problem is Greece.

I've been a little uncomfortable with the idea that a Greek departure would represent a "Lehman moment", but that it might be, in the sense that euro powers could remain blind to their actual predicament until markets rattle them into awareness.