Why Euro Spillover From Greece Will Probably Be ContainedSimon Kennedy
Greece is approaching the edge of the cliff again.
Investors and economists are speculating on the prospects the nation will remain in the 19-nation euro area or be forced out by political and financial miscalculations -- a rerun of the crisis that peaked almost three years ago. A review of Bloomberg News stories shows that use of the word “Grexit” is higher than at any time since those dark days of 2012.
The tumult follows this week’s election of Alexis Tsipras as prime minister. He won on a platform incompatible with the terms of the bailout loans Greece has relied upon since 2010. He promised a debt writedown, higher pay and an end to austerity.
While he has committed to do all that while staying in the euro, analysts say he’s on a collision course with his European peers that might still spell Grexit.
So how likely is it? At Berenberg Bank in London, chief economist Holger Schmieding puts the chances at about one in three.
Here are the arguments made by economists on either side of the debate:
WHY GREECE SHOULD GO:
* DEVALUATION: A weaker currency should spur exports and tourism. * PUBLIC FINANCES: The budget excluding interest payments is in surplus as is its current account. Bond yields are lower than where they were in 2012. * POLICY FLEXIBILITY: Athens would not be subject to the dictates of creditors, allowing a looser fiscal policy amid unemployment of about 25 percent.
WHY EURO ZONE SHOULD LET GREECE GO:
* LESS SPILLOVER RISK: Spain and Ireland have turned the corner economically, while Portugal wants to pay off the International Monetary Fund early. * STRONGER DEFENSES: Three years ago, Europe had only a makeshift temporary bailout fund. Now it has the 500 billion-euro European Stability Mechanism. The European Central Bank is even about to buy government bonds for monetary policy-reasons. * A MESSAGE TO OTHERS: A chaotic Greek departure might send a message to others that euro membership is worth the price of fiscal rectitude and economic overhaul.
WHY GREECE SHOULD STAY:
* HYPERINFLATION: Introducing a new currency could send inflation soaring, wipe out small savers and business and push up bond yields at a time when Greece would probably be an Argentina-style pariah in markets. * BANKS: Commercial banks would lose access to ECB support, which as of late October totaled 44 billion euros. A bank run may be set off as investors seek to remove the deposits they haven’t taken out already, making capital controls necessary. The FTSE/Athex Banks Index this week closed at its lowest level since at least 1995. * VOTERS: For all their complaining, opinion polls suggest about three-quarters the public want to stay in the euro.
WHY EURO-ZONE SHOULD KEEP IN GREECE:
* PRECEDENT: The loss of Greece would prove that the 16-year old euro wasn’t built to last. As in the last round of crisis, investors would quickly begin assessing the vulnerabilities of the next potential exit candidates. * ECONOMIC FALLOUT: The resulting spike in uncertainty and bond yields would slow a euro-area economy already forecast by the IMF to grow just 1.2 percent this year, or one-third the pace of the U.S. Without Greece, the euro could be an even stronger currency, squeezing exporters such as those in Germany. * MELTDOWN RISK: Barry Eichengreen of the University of California-Berkeley says, Grexit could end up being “Lehman Brothers squared.”