Greece Risking ‘Chaos’ Has Eichengreen Urging Lesser Evil

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Greek Prime Minister Alexis Tsipras
Prime Minister Alexis Tsipras will raise the standoff in bailout negotiations on the sidelines of talks to be held May 21-22 in Riga, according to a Greek government official. Photographer: Kostas Tsironis/Bloomberg

Greece’s exit from the euro would unleash turmoil whose fallout will far exceed the cost of staying in the currency union, said U.S. economist Barry Eichengreen.

Reintroducing the drachma would solve none of Greece’s problems and instead set the stage for “even more chaos and uncertainty,” Eichengreen, a professor at the University of California, Berkeley, said in an interview in Prague on Friday.

“Staying in the euro zone will be costly and difficult for Greece and for Greece’s partners, but Greece getting out of the euro would be even more costly and difficult,” said Eichengreen, author of “Hall of Mirrors,” a book comparing the crises of the Great Depression and the Great Recession. “Staying in the euro is the lesser of evils under these circumstances.”

Greece, Europe’s most-indebted state, is struggling to resolve talks with its creditors over the terms attached to its 240 billion-euro ($274 billion) bailout. Uncertainty over the country’s future in the euro area has triggered a liquidity squeeze, pulling the economy back into a double-dip recession. Prime Minister Alexis Tsipras says he’s not considering leaving the currency bloc and is focused on getting the aid he needs to avoid a default.

“Anything can happen, but my guess would be that it will have debt restructuring, default on its debt -- to put it in more provocative terms,” Eichengreen said. “But it will stay in the euro area.”

Riga Summit

Tsipras plans to press fellow European Union leaders to help resolve the deadlock in talks with creditors and will raise the standoff in bailout negotiations on the sidelines of talks to be held May 21-22 in Riga, Latvia, according to a Greek government official.

Spanish Economy Minister Luis de Guindos is “optimistic” that an agreement will be reached in the coming days, saying Greece has no room for maneuver in the bailout talks.

“This deal is essential for Greece given its liquidity situation,” de Guindos said in a speech in Madrid on Monday. “It’s essential that we get a deal to prevent this situation becoming more difficult and complicated.”

Greek bonds and stocks fell on Monday. The yield on the 10-year note rose 30 basis points to 11.06 percent. It climbed as high as 13.93 percent in April, the highest since December 2012, after dropping to as low as 5.52 percent in 2014. The benchmark Athens Stock Exchange General Index fell 2.3 percent.

No Relief

“None of this will be resolved quickly,” Eichengreen said. “I think that the uncertainty will continue.”

Just as unclear is the potential impact on the currency bloc of the so-called Grexit. While officials insist publicly that the rest of the euro area is protected against the fallout should Greece fail to reach a deal, last month some finance ministers called for contingency plans to be drawn up to bolster their defenses.

“The next time there’s a shock of some kind in Europe, people would immediately ask the question of what will Portugal do or Spain,” Eichengreen said. “We have absolutely no idea how a Grexit would impact the markets.”

Talks between Greece and its official creditors “are now in a decisive phase” and time to reach a preliminary deal is “very limited,” EU Economic Commissioner Pierre Moscovici said on Monday. The only scenario being considered is a “a strong Greece in a strong euro zone.”

Visible Impact

The European Central Bank’s bond-buying program has had a “visible” impact on the continent’s securities markets and deflation, according to Eichengreen. Quantitative easing is “one of the reasons” for the upswing in the European economy.

The ECB embarked on large-scale asset purchases in March and envisages spending 1.1 trillion euros through September 2016. The euro-area economy grew at 0.4 percent, the fastest pace in almost two years, in the first quarter.

At the same time, the program “gives rise to distortions” and leads to “problems of liquidity,” Eichengreen said.

“The ECB was correct to launch the QE,” he said. “There have been benefits but there’re also problems when you have a cancer patient and administer chemotherapy, you can cure the cancer but create other problems.”

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