BY PREETI UPADHYAYA
In the saga of the financial crisis crippling the Eurozone, it is fitting that Greece has been the currency union’s Achilles Heel. The country is running on fumes. Under a caretaker government, its coffers are nearly empty and there are legitimate fears that by the end of June, Greece will be unable to qualify for a second round of bailout disbursements negotiated by the EU and the International Monetary Fund.
On top of that, the radical leftist anti-austerity party Syriza came in second place in last month’s elections and its leader, Anthony Tsipras, has laid out specific policy proposals that are in direct opposition to the country’s financial backers. The combination of these forces has turned the once distant possibility of Greece exiting the Eurozone into a much more plausible event.
However, experts say there is little incentive for either the Greeks or the rest of the Eurozone for an exit to happen. An exit from the Eurozone is unprecedented, and the cost of Greece leaving is difficult to calculate, though the figure has been roughly estimated between 600 billion and one trillion euros.
A Greek exit “would trigger a huge wave of contagion and uncertainty throughout the Euro area. A Greek exit would especially endanger the adjustment efforts in Italy and Spain, and we’re talking about a potential meltdown of the whole Eurozone,” said Domenico Laurenti, senior fellow in the Global Economy and Development Program at the Brookings Institution in Washington, D.C.
Greece’s economy would also suffer tremendously were it to leave. Without aid from the European Union and the International Monetary Fund, Greece would likely see severe economic contraction and might enter a long, painful period of slow rehabilitation. It would also be isolated from most of its major trading partners.
“Essentially Greece would be cut out of the European markets. As long as they stay, Europe will provide a better anchor of stability that goes well beyond the common currency. Were Greece to leave the Eurozone and the EU, the anchor of stability would be lacking and there would be financial panic all over the country, which could trigger adverse political actions,” said Laurenti.
There are plenty of arguments suggesting that a Greek exit from the Eurozone is not a matter of if, but when. The country’s ballooning government debt and rigid economic structure make it extremely uncompetitive on the global market.
Steve Dunaway, formerly a senior official with the International Monetary Fund, explained that while an exit from the Eurozone might be initially very shocking and painful, it could be the best option for Greece in the long term.
“The benefit is that the Greeks would get their old currency back and an immediate, sharp exchange rate depreciation which would help make the country more economically competitive, especially in terms of tourism,” Dunaway said.
Greeks will go to the polls to elect a new government on June 17, and this election will be a deciding factor in the country’s economic fate.
“The Europeans have factored [Greece’s situation] into their policy plans and as long as Greece will be able to form a pro-European, pro-Reformist cabinet, they will find a solution,” said Laurenti.
He added, “These are uncharted waters and with such a complex situation and multiple players, an unexpected bad event could happen that could escalate the crisis and push Greece out.”
If Greece in fact cannot make the necessary adjustments to remain in the Eurozone, it will be an unprecedented change in the twelve-year-old currency union, and the economic and political ramifications are largely to be determined. Fears of a domino effect are at the top of the minds of policymakers. If Greece goes, the next countries likely to follow suit are Spain and Portugal, and potentially Italy.
“One of the benefits of a currency union is that it lowers transaction costs and increases trade. The smaller the union gets, the less these benefits apply, so the less attractive the EU becomes altogether. Nobody wants to set this precedent,” said Jakob Thomas, a research analyst at the Milken Institute, a Santa Monica, California- based economic think tank.
And while Greece constitutes only 2% of the Eurozone’s GDP, Spain, Italy and Portugal are a “really systemic component of the Euroarea”, said Laurenti.
Until Greece’s elections are determined, it is a waiting game to see whether the country will remain in the Eurozone. However frightening the possibility is, a Greek exit from the Eurozone is not a deliberate policy on anyone’s part. Not only would Greece be leaving the currency union, it would also have to forgo its membership in the European Union.
“Keeping Greece in is important to the stability of the Eurozone, which is important to the stability of the whole global economy,” said Laurenti.