It is as hard to conjure up the right metaphor as it is to figure out why nobody outside Greece seems to be worried. The risk that the euro area is about to go up in flames is rising by the day.
It is, perhaps, a little like the UK bond market in the days leading up to the outbreak of the first World War: until the guns actually started firing nobody involved in trading government debt seemed to notice that things were likely to get a little tricky.
Maybe it’s perfectly rational to decide that, when risks can’t be calculated with any degree of precision, it is only sensible to ignore them. If we can’t measure something it is pointless to try.
What is the chance of Greece leaving the euro? Before we even try to guess at an answer it is important to correct an important belief that is widely held but utterly wrong: a Greek default on its debts is not the same thing as a Greek exit from the euro. Not even close.
One event may well follow the other but it is not automatic and will only happen (a) if Europe’s political elites make an explicit decision to boot the Greeks out following a debt default or (b) the Greeks simply announce the reintroduction of the drachma.
Written in the rules
There is nothing written in the rules that means a Greek default must lead to exit from the euro.
All sorts of nasty things will happen after a default but it isn’t necessarily the case that reinstating the drachma has to be one of them.
It is easy to assess the risks of a Greek default. That’s as close to certainty as it ever gets. We can be far less sure about the timing but the event is almost guaranteed: Greece will not pay back all that it owes.
The form of that default is also uncertain: it could be quick and cataclysmic or it could just be disguised in a perpetual game of extend and pretend.
Cataclysmic for whom? One of the reasons why financial markets are not too concerned is that they have been reassured by virtually all the important actors that a Greek exit would just be a locally damaging affair. Only the Greeks are likely to get hurt. While it seems to me that it would be foolish in the extreme to test this assumption in combat, few others appear to be similarly worried.
Contrary to popular opinion, most legal systems are designed not to produce “justice” but rather a method to resolve disputes that would otherwise fester for eternity.
Most lawyers make the bulk of their money out of boundary disputes between neighbours. The courts are there to bring some kind of end to the process, one that stops short of open warfare.
The problem that Europe faces is that the argument between the Germans and the Greeks is one where there is truth on both sides but there is no referee and no judicial process that even attempts to bring the dispute to a semi-civilised conclusion.
Missing in action
The only institution capable of acting as an impartial judge is the IMF which, sadly, has gone missing in action. Some would say it has taken sides.
It is striking that many IMF officials start penning deep and bitter critiques as soon as they leave the organisation. And they all say pretty much the same thing: the IMF has backed the wrong horse all through the financial crisis.
It is possible, just, to spot some internal recognition of this: buried in its latest World Economic Outlook there are glimpses of the odd mea culpa by serving, as opposed to ex, IMF staffers.
A dispute about much, much more than a garden fence, where both sides have a point, needs a mechanism to bring closure. Without a resolution process a crisis is likely. It is hard to escape the conclusion that this is all going to end badly.
It would be foolish to try and be more precise than this. But there is, already, one lesson (at least) to be learned. No matter what we think about truth, justice or austerity, electing a government to pick a fight with Berlin and Brussels is an exercise in painful futility.
