23rd May 2019


Why Asians should not be spooked by Grexit

  • Money from 1907, Deutsch-Asiatische dollars issued in Shanghai (Photo: EUobserver)

The Greek crisis has spiraled into a deeper, darker abyss following its referendum on the international bailout package held last Sunday, which resulted in a resounding ‘Oxi’ or No vote of 61.31 percent.

On Tuesday, at an emergency summit of the Eurogroup in Brussels, Greece failed on its promise to turn up with a new proposal, prompting leaders to openly discuss a Greek exit from the euro.

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  • A Grexit would not be as big a catastrophe as many expect it to be (Photo: John D. Carnessiotis, Athens, Greece)

Greek banks are now days from shutting down - down to their last $555 million - or about $50 per person in a country of 11 million.

Grexit seems more likely now than ever and on Sunday (12 July) at a meeting of all 28 EU member states, the impending decision might just be taken. Markets across the world have reacted strongly to what is seen as an impending doom or as some have called it, a calamity worse than the 2008 collapse of the Lehman Brothers.

In reality however, a Grexit would not be as big a catastrophe as many expect it to be.

For one, Greece is a small economy in the eurozone or the group of 19 countries who have the euro as their currency. Its economy is only 2 percent that of the eurozone’s total GDP.

Bailouts of €240 billion to date have not helped the Greek economy much and coupled with austerity measures have conversely hit growth and triggered further unemployment.

More bailouts, provided the eurozone’s 18 other members agree to them, cannot incontrovertibly be expected to solve the crisis anytime soon either.

Former Greek finance minister Yanis Varoufakis has indeed likened the bailouts to a “fiscal waterboarding” which has, according to him, turned Greece into a “debt colony”. Further bailouts and austerity would only lead to a continued Greek recession and a persistent image of a eurozone in crisis.

The world has watched with bated breath the eurozone grappling with the Greek financial crisis for years without an end in sight.

Markets have tumbled and jittered with every eurozone meeting or statements from EU officials, International Monetary Fund chief Christine Lagarde or subsequent Greek governments.

But it is essential to note that the vast majority of the information in the media on the Greek crisis comes from Europe. And in Europe, this is a very emotional and political issue.

Grexit can stabilise the euro

Ideally, it would have been more effective to quarantine Greece with a temporary exit from the euro, reintroduction of the former Greek currency, the drachma, and a return to the eurozone once its economy has stabilised.

Many here though abhor the notion of a Greek exit from the eurozone. A Grexit is seen as a failure of the euro project and the EU itself, setting in the process a precedent for future exits.

But reality would be far from that. A Grexit would not end the EU or the eurozone.

It just might send a signal to the rest of the world instead that the Eurogroup is indeed willing to take serious steps to stabilise itself, that the euro can be a safe, reliable currency, and that its mechanisms are much stronger than they previously were.

A precedent too, does not have to automatically be a dire one and a temporary Greek exit from the eurozone could indeed set a good precedent if any at all. Moreover, weaker economies like Ireland, Spain, Portugal, and Italy today are not in as bad a position as Greece either to follow suit.

Many in Germany, including members of the country’s ruling party, the conservative Christian Democrats (CDU), too support the idea that the eurozone might be better off without Greece.

This view is echoed according to Greek newspaper Kathimerini, by 16 eurozone countries.

The Greeks could just as well be better off with financial autonomy and devaluing the drachma (if reintroduced) in order to boost exports.

The eurozone is a monetary union sans fiscal union and a single member country can neither devaluate the currency nor print more unilaterally. Nine other countries in the EU have their own currencies and operate seamlessly within the regional bloc.

Asian impact

Any real impact of a Grexit on Asian markets would only be circumscribed given that the eurozone is still a growing economy registering 0.4 percent in the first quarter of this year.

The French and German economies – two of the largest in the Eurozone – have grown in the first quarter of 2015 by 0.6 percent and 0.3 percent, respectively, and Germany is by far the largest trader with Asian countries within the EU.

Large emerging markets in the region like India are also driven by internal consumption and less prone to contagion. In addition, Asian markets are deeply integrated amongst themselves and in particular with China than Europe.

Importantly thus, it is the ensuing Chinese stock market crash that is of real concern as the Shanghai Composite Index has recently registered a fall of 32 per cent.

The crash has already wiped trillions of dollars off the country's stock markets. Given that China is the world’s second biggest economy; its households have a major impact on global consumption.

When the Shanghai market began to plummet in June already, the dollar rose in value but a continuation of the trend would ultimately mean trouble for US stocks.

With the Chinese stock market drawing attention, a possible Grexit would have less impact globally and the eurozone could effectively tackle the crisis in Europe without much global turmoil.

As a Grexit appears on the horizon, it is important that European leaders convey the real, emotionally-detached view of the impact a Grexit could have both on the eurozone and the EU.

While politically Grexit might signal a step back for EU integration, it must surely not be allowed to spell doom for the rest of the global economy.

Gauri Khandekar is Europe director of Indian think tank Global Relations Forum, based in its Brussels office


The views expressed in this opinion piece are the author's, not those of EUobserver.

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