The spring meetings of the International Monetary Fund (IMF) and the World Bank offer a great opportunity to listen to policymakers explain their views on the evolution of the world economy. For those of us interested in Europe, the focus at this year’s meetings was on the double feature of German Finance Minister Wolfgang Schäuble and Greek Finance Minister Yanis Varoufakis at Brookings last Thursday. It was a good match-up that offered few fireworks. Both sounded reasonable without departing from their basic positions. Schäuble wants Greece to honour its commitments; Varoufakis wants Greece’s creditors to embrace of new set of priorities for reforms. Both also claimed to speak in the interests of Europe writ large and neither accepted the possibility that interest could coincide with Greece leaving the euro. Hence it would be easy to come away with the impression that whatever the status of the negotiations things are unlikely to fall apart over Greece. And I suspect that was the goal — to convince investors to view the latest setbacks in negotiations as a reflection of ‘normal’ European politics.

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According to analysts at Macropolis, the Greek banking system lost € 24.6 billion in deposits between December 2014 and the end of February 2015. The money has tended to ebb and flow in line with the tension in the talks between the Greek government and its creditors. On balance, however, the flow has exceeded the ebb and so the Greek banking system is now weaker on the liability side than it has been since 2012. Such a trend cannot continue indefinitely. And, as one-time chairman of the Council of Economic Advisors Herbert Stein once quipped, if something cannot go on forever, it will stop.

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As the French National Front barrels into the first round of local elections this weekend, the international media is sure to latch onto its anti-European (or Euroskeptical) rhetoric as a sign of the times.  Indeed, given the raft of Euroskeptical parties like the UK Independence Party (UKIP), the Alternative for Germany, the True Finns, the Sweden Democrats, the Dutch Party of Freedom (PVV), and the Italian Northern League, it is easy to jump to the conclusion that Europeans have lost confidence in ‘Europe’ as a political project.  One look at the travails that European leaders have faced responding to the macroeconomic crisis and it is not hard to see why that is the case.

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Two of the most important macroeconomic stories today are dollar strength and euro weakness. The dollar strength story is important because it threatens to sap momentum from the U.S. economic recovery and to give pause to monetary policy makers on the federal open markets committee of the U.S. Federal Reserve as they consider when to start raising interest rates. The euro weakness story is important for the opposite reason, because it promises to breathe life into the euro area economies even as it lowers the pressure on the Governing Council of the European Central Bank. My point in this note is not to deny the significance of these reflected narratives, although I do think they warrant qualification; rather I want to focus attention on the currencies (and economies) caught in between.

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The second Minsk accords have succeeded in fostering a cease-fire and yet the Russian government continues to support the armed separatist movement in eastern Ukraine, small acts of violence continue to take place, and the peace is fragile. The challenge for western policymakers is to come up with some greater incentive for Russia to embrace a lasting peace settlement. The threat of large-scale western military assistance for the Ukrainian government is unlikely to be sufficient. Russia has the advantage of proximity and a greater stake in victory than the west. If anything, overt western military involvement could cement support behind Putin in Russia and lead to further escalation in Ukraine.

The alternative sources of western leverage over Russia are only slightly more attractive and the prospects that any new sanctions will find agreement in a European Council that includes Cyprus, Greece, Hungary, France, and Italy are slim. Nevertheless, there is one financial sanction that seems to be gaining traction in conversations on both sides of the Atlantic. That sanction is to exclude Russian banks from the financial messaging service known as SWIFT — the Society for Worldwide Interbank Financial Telecommunication. British Prime Minister David Cameron raised this prospect last August suggesting that excluding Russian banks from SWIFT would offer considerable leverage over the Russian government. He returned to the idea late this February.

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Two of the great risks facing the European Union (EU) economy are the exit of Greece from the euro area and the exit – or distancing – of the United Kingdom from the European Union.  It is easy to think of these threats as similar, even if only because they have similarly catchy names to use in popular debate.  But Kings College London Professor Anand Menon reminded me in a recent conference call that they are actually very different.  His point was that any British exit from the European Union – or ‘Brexit’ – would be a long, difficult, and conflictive process.  My argument here is that any Greek exit from the euro – or ‘Grexit’ – would centre on a short, punctuated event.

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Today was another ‘crunch day’ in the negotiations between Greece and its creditors in the euro area.  The Greeks have made their proposal.  Now the Economics and Finance Ministers have to make a decision about whether to extend the Greek bailout That decision may require that the Greek government offer even more.  The Greek government is reluctant because it fears betraying the electorate that just voted it into office.  The German government is reluctant to concede more either because it has its own voters to worry about.  It also has to worry about its allies – like Finland, Slovakia, Portugal, Ireland, and Spain – who have supported a hard line on Greece, also for domestic political reasons.  Hence we are at a democratic impasse.  The two sides are close to an agreement, but close is still ‘no cigar’.

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As an academic, I am interested in the power of ideas. If ideas didn’t matter, I would probably look for another job. Fortunately, the power of ideas is all around us. This is not a reference to the terrible events in Copenhagen, although I suppose it could be. That was a conference about ideas attacked by people who have a deep fear of the power of ideas to threaten them. Slavoj Žižek made that argument about the Charlie Hebdo attacks earlier this year; his reasoning applies equally well in this more recent tragedy.

The power of ideas I find most interesting at the moment centers on the notion of credibility. The reason this is interesting is credibility can seem so solid at one moment only to collapse in another. I worry this could happen to the euro as a single currency if some accident were to happen and Greece were to leave the euro. This essay is a long way of making a simple point.  Anyone who thinks that Greece can leave the euro without having dramatic consequences is underestimating the power of ideas.

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Central bank independence used to mean that central bankers would take economic decisions without regard to the political consequences; now it appears to mean that central bankers take political decisions without regards to the economic consequences.  This is a very bad development for macroeconomic policymaking because it is likely to give political momentum to those who oppose the prevailing policy framework.  The result will be a crisis of legitimacy for the central banking community and an increase in volatility and uncertainty in the world economy writ large.

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