There are good days and bad days, but even on the good days the abyss is never too far away. The eurozone’s dangerously original mix of innovation, incoherence, and unaccountability makes it difficult to identify a single event that could finally push it over the edge. But, with confidence already shot, there is one obvious contender, a series of old-fashioned bank runs given a brutal new twist by the logic of currency union as cash pours out of the stricken banks and the country (or countries) that hosts them. Unless the European Central Bank could show that it has what it really takes, fear would feed on itself, credit markets would seize up, and that, quite possibly, would be that.
The extra liquidity offered by the Fed and other central banks on November 30 was a sensible precautionary move, but its extent and its timing were clear signs of anxiety that, while the eurozone’s leadership moves from grand plan to grand plan, the building blocks of disaster are falling into place. U.S. institutions are wary about extending short-term funding to many European banks. European banks are wary about lending to each other.
Of all the sickly banks surviving on the Rube Goldberg life support systems now being deployed in the eurozone’s grisly ER, Greece’s are probably (and the implications of that “probably” are appalling) the most vulnerable to the panic that could set everything off. Their country is the closest to default. If Greece goes under, its banks will, without fresh capital, go under too. So what are their depositors doing?
They are not yet running. But they are walking away at an ever quicker pace (deposits have fallen by over 20 percent since January 2010) that can only have accelerated since the moment in early November when Angela Merkel and Nicolas Sarkozy first conceded that a country’s eurozone membership might not be irrevocable after all.
To understand just how bad things could get, the best place to look is Argentina in early 2001. In 1991, just 10 years before, Latin America’s most gorgeously faded republic had decided to turn over its latest new leaf. It linked its peso to the dollar at a 1:1 exchange rate. This peg was backed by reserves held by a currency board. Despite its distinctly permissive, distinctly Argentine, characteristics, it was designed to use external market pressure to force the country into the tough financial discipline that it had found impossible to impose upon itself. Those Greeks who regarded the EU’s single currency as something more than a free lunch supported signing up for the euro for pretty much the same reason.
At first, the Argentine experiment worked well. The economy grew briskly, and foreign lenders were pleased to feed its growth in a manner well beyond the capability of Argentina’s relatively small banking sector. After all, they told themselves, the country had changed its ways, and, thanks to the peg, exchange risk had been hugely reduced. What could go wrong? If you think that sounds a lot like the talk that accompanied the prolonged surge in international lending to Hungary, Latvia, Greece, Ireland, and all the other future catastrophes crowded into the euro’s waiting room (and, subsequently in some cases, the eurozone itself) just a few years later, you’d be quite right.
What could go wrong, did: Deep-seated structural flaws within the local economy, a series of external shocks (starting with the Mexican crisis of 1994), weaker commodity prices, and stresses flowing from the fact that the dollar and the peso were an ill-matched pair all combined to push the country into difficulties made cataclysmic by ultimately unsustainable levels of foreign debt. Private lenders shied away. Private capital fled. Taxpayers hid. Ratings agencies screamed. The cost of borrowing soared. The resemblance to Greece in 2011 is unmistakable. Interestingly, the Argentine storm was gathering strength at the same time as Greece was being accepted, not without controversy, into the eurozone, raising the question what in Hades the EU’s leadership was playing at. The implicit warning for Greece contained in the Argentine disaster was as clear as Cassandra, and just as ignored.
In any event, as the 20th century lurched into the 21st, Buenos Aires previewed Athens. There were differences, of course, not least the fact that Argentina had hung on to its own national currency, but that meant less than it might have done. By the end of the 1990s, 90 percent of Argentina’s public debt was denominated in a foreign currency, marginally better than Greece’s 100 percent (for these purposes the euro is a “foreign” currency everywhere), but not by enough to give any comfort. And it wasn’t just the debt: Wide swaths of the economy had been dollarized.