ANALYSIS:TALK OF a Greek exit from the euro zone is gaining traction rapidly. As political leaders squabble in Athens, the outlook for the country is more uncertain than ever. But would Europe really cut Greece loose from the single currency?
If a gathering chorus of central bankers and finance ministers is to be believed, then maybe Europe would. But the Greek leftist Syriza party has clearly made the calculation that Europe would never let Greece go, chiefly because of the contagion risk for everyone else.
Syriza, which came second in the election nine days ago, is campaigning to repudiate the EU-International Monetary Fund deal and Greece’s commitments to the troika. The party wants to keep the country in the euro, but on its terms only.
These include the unwinding of pay cuts and the recruitment of an additional 10,000 civil servants. Any such measures would be in clear defiance of Greece’s arrangements with the troika.
As Athens lurches towards a second election, rising opinion poll support for Syriza gives its leader, Alexis Tsipras, an incentive to hold out against any deal to work the EU-IMF plan.
From Europe, in response, comes the furious sound of increasingly dire warnings and claims that the authorities now have it within their powers to arrest contagion and limit the impact of any Greek exit.
Other weakened countries – Ireland among them – would be in the line of fire. So would the banking system. Despite the abundant risks in such an event, the kind of people who would never publicly contemplate a return to the drachma are talking openly about it.
Central Bank governor Patrick Honohan says a Greek exit would be unpleasant but not necessarily fatal. His Belgian counterpart Luc Coene speaks of regrettable but amicable divorce. Bundesbank chief Jens Weidmann says the consequences would be more serious for Greece than for the rest of the euro zone.
These men have seats on the European Central Bank governing council. From the bastion of financial stability in Frankfurt, this is stirring, ominous stuff.
The question naturally arises as to whether the hard talk should be filed under mere rhetoric, designed to bring the Greeks to their senses. After all, Tsipras and those who indulge him seem impervious to the risks he is running. As for his voters, the feeling in Brussels is that they are being shamelessly led up the garden path.
So are the siren calls about a Greek exit grounded in reality? Or is something else at work? “I don’t think anyone is engaging in rhetoric,” says Minister for Finance Michael Noonan. “I think all the statements are measured but I wouldn’t have the inside track in knowing what the objective of the measured statements was.”
There is no doubting the ardent hope that the Greeks finally agree a government, implement the EU-IMF deal and face down the naysayers. It is true thatthe bailout deal assumes the Greek people continue to bear fiscal pain for years to come. Even if a coalition is formed, the going will be very tough indeed.
This helps explain the sense that the endgame may well be afoot. The risks are huge. In a report last month, the IMF said the potential consequences of a disorderly default in the euro were unpredictable.
It warned of full-blown panic in financial markets, severe pressure on other frail countries and deposit flight from several banking systems. “Under these circumstances, a break-up of the euro area could not be ruled out.”
The IMF also warned of “major political shocks” and financial market stress beyond that seen after the Lehman bankruptcy. The stakes just rise and rise.
