28th May 2023

Brinkmanship rhetoric hides cost of Greek euro exit

Within the space of one week, EU politicians have begun talking in a matter-of-fact way about Greece's possible exit from the eurozone, but analysts say the event would involve upheaval far beyond what the casual statements imply.

German finance minister Wolfgang Schauble changed the terms of the debate on Greece last week by saying that he thought the eurozone would be able to withstand the country leaving the single currency.

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  • The tough talk belies the upheaval a Greek exit from the eurozone would cause, say analysts (Photo: John D. Carnessiotis, Athens, Greece)

European Commission President Jose Manuel Barroso was the next to raise the pressure. "If a member of a club does not respect the rules, it's better that it leaves the club, and this is true of any organisation (...) or project," he told Italian TV channel Sky Tg24 last week.

His spokesperson on Monday (14 May) emphasized that his comments were meant to be understood generally.

Central bankers have also raised the issue. "I guess an amicable divorce, if that was ever needed, would be possible but I would still regret it, said Luc Coene, central bank governor in Belgium.

"The consequences for Greece would be more serious than for the rest of the eurozone," said head of the Bundesbank Jens Weidemann at the weekend.

The change in tone emerged after Greek elections on 6 May where around two thirds of the population voted for parties that want to modify or scrap entirely the tough reform programme attached to the country's two bail-outs.

As Greek politicians have struggled to form a coalition and look to be heading to a second round of elections in June, EU politicians have been hammering home the message that they must stick to implement further austerity measures or risk exiting the single currency.

The brinkmanship comes as polls show that a majority of Greeks want to stay in the currency.

And in Brussels, the thinking is that opening room for manoeuvre on the bail-out's harsh austerity programme ahead of the June elections would further boost the radical anti-bail-out camp, currently leading in the polls. "If it's a binary choice - they either stick to the rules or leave the eurozone - people will know whom to vote for," one EU source told journalists on Monday.

But some analysts say the who-blinks-first talk of a 'Grexit', as it has been dubbed, is playing with fire.

"Greeks, European policy makers talking about exit in a casual blase way are highly, highly irresponsible," Sony Kapoor, director of the Re-Define think-tank, told BBC radio. "Total cost versus the total benefit remains overwhelmingly negative, both for the eurozone and Greece."

Peter De Keyzer, chief economist at BNP Paribas Fortis, said both Greek and EU politicians "are bluffing." He and other economists say that the eurozone can survive a Greece exit but ask at what cost.

"If Europe says we can handle this without anything happening, this is not true. And if Greece says, 'we can get out, there is no problem', that is not true either. And I think both (sides) know that. The big question is going to be who is going to blink first," he told this website.

For the rest of the eurozone, the issue is whether the contagion effect resulting from a Greek exit can be contained. People with savings in Spain or Portugal, for example, might judge it safer to move their money somewhere else.

"It's a firewall against investors' emotions and their fear and it is very hard to say whether you will succeed," says De Keyzer.

Economic catastrophe

For their part, ordinary Greeks are set to experience economic catastrophe. GDP would plunge while inflation could rise by as much as 50 percent, he estimates.

Cinzia Alcidi, an economist at the Brussels-based Centre for European Policy Studies, notes: "The government simply does not have any money. Pensioners will not be paid. There will be no salaries for civil servants. The banking system will collapse immediately."

Exiting the eurozone should not be seen as a solution, says Alcidi, who says that many of the reforms attached to the EU-IMF bailout will have to be carried out anyway.

"Let's assume Greece exits. The peculiar thing is that in six to 12 months time, Greece will be negotiating again with the EU, with the IMF and the ECB on how to get out of the mess that they are in. They cannot pull themselves out of this alone," says De Keyzer.

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