There’s an undercurrent in debate on Greece which suggests the country could be expelled from the euro zone without any lasting woe for other members of the single currency. I just don’t buy it.
Turmoil would be inevitable in that event and it would not be limited to Greece, as some of its more ardent opponents suggest. While the increasingly shrill confrontation between Athens and its creditors prompted volatility in financial markets this week, market participants still believe some kind of a funding agreement will be reached eventually. The implication must be that the present volatility would intensify appreciably if no deal was done and Greece went back to the drachma. It is difficult to believe otherwise.
Such volatility could well be sustained for a prolonged period view of the demonstrable fact that Europe’s currency union was – after all – reversible.
This is the very thing that an assortment of European Central Bank firewalls and official rescue funds were set up to prevent, at great political cost and amid constant crisis between 2010 and 2012.
True enough, the likely deployment of ECB firewalls could probably contain the flames in the first instance. But a new vista would still open up. A “Grexit” would set a very dangerous precedent, one with particular implications for heavily indebted smaller states such as our own.
No matter what was done in future to maintain order in the domestic economy, vulnerability to external shock would increase and the capacity to withstand shock would decrease.
Disorder in the domestic economy would carry increased risk, though there is a theory that implicit threat of expulsion for errant members of the currency club would carry far greater dissuasive power than the current fiscal rules.
At the same time, pressure on any other euro zone to follow Greece from the currency would create similar trouble for other weaklings. This is to say nothing of increased sovereign borrowing costs arising from a reappraisal of risk throughout the euro zone.
Broad spectrum of risk
In sum, the spectrum of risk in a Grexit scenario is as broad as it is unappealing. It’s not that anyone in Brussels, Berlin or any other European capital proclaims it too loudly.
As the rhetoric intensifies, most of the warnings from European leaders are directed towards Greece and the impact on its people of a departure from the euro. Yes, there is no doubt but that a Grexit would cause great hardship for Greeks and that they would suffer the most. They would not be alone, however.
As the global economy struggles to shake off the legacy of the 2008 crash, it would be difficult to construe a Grexit as anything other than a major setback with consequential risk all of its own.
Janet Yellen, chair of the US Federal Reserve, said quite clearly the other day that there would be an impact, not only on the rest of the European economy but on the rest of the world too. This seems about right.
“In the event that there is not agreement, I do see the potential for disruptions that could affect the European economic outlook and global financial markets,” Ms Yellen said.
“I would say that the US has very limited direct exposure to Greece, either through trade or financial channels. But to the extent that there are impacts on the euro-area economy or on global financial markets, there would undoubtedly be spillovers to the US that would affect our outlook as well.”
It follows that this was more a direct entreaty to Europe to settle the matter than a coded warning. Easy to say, difficult to do. The Greek government seems to be making the exact same calculation about the risk to others from its prospective exit from the zone. Hence its willingness to push the talks to the very limit, even as rancour and bitterness mount.
The mood is black in the euro zone these days and there is no end of rumour and speculation. The hunch must be, however, that a deal will be done in the end. The final arbiter will be German chancellor Angela Merkel, still the pre-eminent figure in European politics. Given everything which has preceded this moment, it would be naive to assume she will not extract a price from her Greek counterpart Alexis Tsipras.
