German Chancellor Angela Merkel now sees an exit by Greece from the eurozone — meaning Greece would return to a national currency — as manageable. Source: Getty Images
GLOBAL financial markets have gone into a spin this week following new speculation that Greece might exit the eurozone.
It all started on Saturday when German magazine Der Spiegel reported that Chancellor Angela Merkel was ready to let Greece exit the eurozone in the event that the far-left Syriza party wins the January 25 election and reverses the government’s austerity policies.
Poll-favourite Syriza, led by Alexis Tsipras, has made it clear it opposes more austerity for Greece, which the “troika” of the European Union, European Central Bank and International Monetary Fund imposed in exchange for the 240 billion euros ($A352 billion) in bailout loans. Syriza has left open the option of defaulting on the country’s massive debt.
WHAT WOULD IT LOOK LIKE?
A government that refuses to pay its debts, bank runs and investors fleeing: that is what a Greek exit from the euro, or a ”Grexit”, would look like according to economists, although most still believe it is unlikely.
Europe has seen this drama play out several times since Greece’s first bailout in 2010: a difficult event for Athens, a more or less official comment coming from Germany, markets tanking on Grexit speculation.
The markets reacted quickly to the German comments.
Investors dumped European equities, with the Madrid stock index dropping 3 per cent on Monday, Paris 3.3 per cent and Milan 4.9 per cent, which sent the euro to a nine-year low.
Greeks go to the polls on January 25, in an early snap general election triggered after lawmakers failed to agree on who will replace the country’s president. Source: AP
They snapped up the relatively safe-haven investments of French and German government bonds, sending Paris and Berlin’s borrowing costs to record lows.
In his blog, French economist Alexandre Delaigue has sketched out the scenario that investors are worried about. “The negotiations between the new Greek government and the troika bog down. As a debt payment becomes due, Athens refuses to pay. That worries everyone, with Greeks rushing to withdraw their savings from banks fearing the country will exit the euro and investors withdraw their capital,” Delaigue wrote.
Bled dry, Greek banks would likely appeal for urgent aid from the European Central Bank. “If the ECB sets conditions (for the government) and Syriza refuses, then suddenly euros issued by the Greek central bank cease to be the same as other euros,” which is a de facto Greek exit from the euro.
Athens “would need to put in place controls to prevent capital flight, issue new money that would rapidly drop in value against the euro, which would make inevitable a total default on debt denominated in euros,” the economist wrote.
Greece’s borrowing rate soared above the symbolic level of 10 per cent, as investors shunned the bond over fears the country could leave the eurozone. Source: AFP
The European Commission insists that membership in the eurozone is legally “irrevocable”.
But “even if there isn’t a clause” in any European treaty about a country quitting the eurozone, “it’s possible to find a legal mechanism” to do so, said Janis Emmanouilidis at the European Policy Centre think tank.
The most drastic solution, and one which is foreseen by treaties, is for a country to leave the European Union.
Few analysts believe this chain of events is likely in the immediate future. Joerg Kraemer and Christoph Weil at Commerzbank noted that Tsipras has yet to win the election, and in any case “neither Syriza nor the European Union want an exit from the eurozone”.
Greece’s main opposition Syriza party leader Alexis Tsipras opposes more austerity and has left open the option of defaulting on the country’s massive debt. Source: AP
They will likely come to a “bad compromise”, keeping Greece in the eurozone “after an exhausting game of poker”, said the Commerbank economists, who put the chance of a Grexit at one in four.
For Christopher Dembik of Saxo Banque, Greece “won’t leave the eurozone today nor tomorrow, but over the long term the question is open” due to its loss of competitiveness given the country’s heavy debt load and the “mistake of the blind austerity” policy.
And the question is not only about Greece, but the survival of the eurozone. “Historical precedents show that it is nearly impossible to keep a monetary union intact once the process of disintegration has started,” he said, pointing in particular to the collapse of the Austro-Hungarian empire.
Delaigue does not exclude the possibility that given the rise in popularity of far-left parties in Spain and Italy, and the extreme-right in France and Germany, that European governments will be tempted “to make an example of Greece: either a country stays in line or it will be thrown out, preferably in the most painful manner”.
The euro sank to a nine-year low Monday as new doubts surfaced about Greece’s commitment to the common currency bloc, triggered by a Der Spiegel report. Source: AP
Meanwhile, EU parliament president Martin Schulz accused German Chancellor Angela Merkel of “irresponsible speculation” on Wednesday for her comments.
“The irresponsible speculation and debate over the ‘Grexit’ really isn’t helping,” Schulz said in comments published by the Die Welt newspaper.
“It should be clear to everyone: there is no question of a withdrawal from the euro. The unsolicited comments, which give the people of Greece the idea that it’s not for them to decide their future via their votes, but up to Brussels or Berlin, could even push electors into the arms of radical forces,” the German member of the European parliament warned.
Greece’s main opposition Syriza party leader Alexis Tsipras speaks to his party’s Congress. Syriza is favoured to win the upcoming national elections. Source: AP
Merkel has come under fire since the Der Spiegel report. The German government has since denied that any such discussion has taken place.
French Economy Minister Emmanuel Macron stressed that Greece’s place was in the eurozone regardless of the colour of the next national government and urged Berlin and the European Central Bank to work towards its economic recovery.
He said French President Francois Hollande would seek to “convince our German partner that France and Germany should go further to relaunch Europe”, when he meets Merkel in Strasbourg on Sunday.
Germany “should invest more. It has an overriding responsibility to do so just as France has an overriding responsibility to carry out reforms,” he added.
“Historical precedents show that it is nearly impossible to keep a monetary union intact once the process of disintegration has started.” Source: AFP
TIMES HAVE CHANGED
Even if Greece were to exit the euro, times have changed. The countries that were seen as vulnerable to “contagion” the last time the prospect of a Greek exit was raised – Ireland, Portugal, Spain – are much less so now.
“Europe has a whole bunch of protections in place that weren’t as well established [last time],” said AMP Capital chief economist Dr Shane Oliver.
“There’s the ESM [European Stability Mechanism] bailout fund, the banking union, and on top of that the ECB looks set to announce a widened form of quantitative easing.”
But Dr Oliver said that wouldn’t stop markets worrying, given the high level of “event risk” around at the moment – the oil price, the Greek election, and next week’s European Court of Justice ruling on the ECB’s plan to buy government bonds.
The so-called OMT, or Outright Monetary Transactions scheme, theoretically allows the ECB to buy up an unlimited number of government bonds to prop up ailing eurozone economies.
Critics questioned the legality of the scheme, claiming it was outside the ECB’s remit. The court’s decision could have a big impact on sentiment.
“You could say we’re in for a sustained period of turbulence,” Dr Oliver said.