Greece leaving scenarios

Two Scenarios of Greece leaving the Eurozone

  1. Domino Effect
  • Nervous depositors in other struggling eurozone countries, such as Spain or Italy, may also move their money to the safety of a German bank account, sparking a banking crisis in southern Europe.
  • If Greece exits the Eurozone, investors will begin to view the weaker European economies- Cyprus, Ireland, Portugal, Spain, and possibly Italy as risks.
  • The European Union accounts for about one-fifth of global trade. As the fallout from the crisis spreads from Greece to the EU, onlookers fear that it won’t stop there.
  • “The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.”-Varoufakis the Finance minister of Greece
  • “For the Eurozone, the biggest risk from Grexit is that membership appears optional. Despite all laws and institutions designed for permanence, any member – even Germany – could be viewed as having one eye on their own exit should some economic disjuncture become unbearable. Moreover, domestic euroskeptic parties would surely try to capitalize on the momentum provided by Grexit. The Eurozone would face a true risk of break up.”
    • Fear of Eurozone breakup could be used as a political incentive to motivate deeper fiscal integration

(http://www.huffingtonpost.com/russell-green/grexit-for-the-good-of-th_b_6737680.html)

  • Under European law as it stands, abandoning the euro probably also means leaving the European Union. A lawyer at the European Central Bank wrote in 2009 that “withdrawal from EMU without a parallel withdrawal from the EU would be legally impossible”.
  1. No effect/no collapse of the Eurozone
  • “The danger of implosion will force Germany finally to agree stand unambiguously behind the euro.This could be done through “banking union” in which responsibility for supervising, winding down and recapitalising big banks is done by some supranational European system. Another option is “fiscal union”, in which at least some of the sovereign debt is mutualised through jointly issued Eurobonds. Doing both would even more convincingly break the deathly embrace of zombie banks and zombie sovereigns.”
  • “A second argument is this: if Grexit provides the powerful impulse for integration, it would also remove the greatest impediment to it. It is hard to imagine any country, let alone Germany, being willing to assume liability for Greek banks that may be about to implode, and for the national debt of a state that has failed to abide by Germany’s prescription for reforms. German officials have a tendency to go out of their way to praise other troubled countries that are reforming, if only to highlight the failures of Greece, and to express their bemusement at the markets’ inability to understand the good that is being done. If Hellas is gone, the pro-Grexit argument goes, then Germany would have fewer excuses to refuse to deploy its full economic might behind the rest of the euro zone.”

(http://www.economist.com/blogs/charlemagne/2012/06/germany-and-future-euro-1)

Political Issues:

  1. Greek Domestic Politics
    1. “Greece’s left-wing Syriza party leads the polls ahead of the elections and is in favour of changing the conditions of the country’s international bailout deal. That would likely anger the rest of the eurozone, which has given Athens the bulk of the rescue loans.”
    2. “Many of Tsipras’s policies “are unlikely to be accepted by the troika of international lenders, despite Syriza’s position having moved to the center in recent times,” said Diego Iscaro, an economist at IHS Global Insight in London. “But it would not be the first party to become more pragmatic once in power.”
    3. “There’s a 15 percent chance Greece will leave the 19-nation currency union if Tsipras forms a coalition government with one of the centrist parties, the Bloomberg survey shows. That compares with 5 percent under an alliance led by New Democracy.”

These three quotes suggest that Greece’s future is unclear at the moment and that a having a newer party in power with a different economic agenda does not necessarily mean that irreparable damages will be made in EU-Greek relations. It is currently too early to assess what action the Syriza party will take in the long-run in terms of withdrawal from the Euro since their strategy may change as they adapt to current circumstances. Also, despite having the “majority” of votes, this is not an indicator of political dominion in politics due to Greece’s multi-party system. In this case, the majority is roughly less than 20% meaning that Syriza must still depend on the other parties’ consent before taking action which would soften the Syriza party’s demands, effectively easing Eurozone officials’ reservations on dealing with Syriza’s restructuring of the current bailout plans. For one, its aim to cut back Greek debt in half is unrealistic and the Eurozone members will likely disapprove of that strategy.

Angela Merkel is specifically unhappy with the demands the Greeks have presented. She firmly believes that in dealing with Southern Europe, it is essential to not appease to their demands because doing so prevents them from making national economic reforms necessary for the EU as a whole. Recently, a consensus has formed among the Northern European powers that the Eurozone could do without Greece, adding to the belief that there is no reason to bargain with Greece. However, Syriza’s lack of government experience also deems it inexperienced in international affairs, potentially causing conflicts with other countries or making reckless negotiations, thus creating a security concern for the EU later on. For this reason the EU would also likely be reluctant to let Greece leave without the ability to at least somewhat manage its political affairs.

Currently, Greece’s politics are relatively stable, in comparison to how bad they could be if Greece were to leave the Euro. If the Greek economy gets (even) worse without the Euro’s monetary power to keep it afloat, then it would become a catalyst for political instability alongside economic instability which would again affect the EU due to increased instability on the continent. Therefore, it is unlikely Greece will sacrifice the relative political stability it has by leaving.

If on the off-chance Greece leaves the EU and other European countries such as Spain or Portugal take initiative playing out the aforementioned domino effect, leftist parties will also gain momentum in these countries creating an ideological rift in the EU. After Syriza’s win, leftist parties in Spain such as Podemos, have been gaining power and popular support. This would further drive northern and southern Europe apart from one another.

Therefore, the Grexit is not merely economic, but also political. For optimum political stability, both for Greek domestic politics and the transnational politics of the EU as a whole, heavily depend on as much cooperation between the Syriza government and the EU as possible. Northern Europe’s worry that southern Europe will adopt leftist governments as means to assuage its economic burden would be lessened if the ECB shows itself to be the more dominant negotiator but still cooperates with Greece enough to show that the Eurozone policies are more effective than the proposed Syriza ones.