Greece is unlikely to leave the eurozone

Since the Der Spiegel article “revealing” that Greece was considering to leave the EMU, there has been a lot of speculation on whether this should be taken seriously. Markets clearly got scared, as the EUR/USD lost around 3 % after the rumour spread. 

However, with Germany in command of the “European situation”, this is unlikely to happen. Germany is still the main beneficiary of the euro-zone (cf here), so they can’t take the risk to weaken it. Despite Greece being a minor trade partner for Germany, there is an obvious risk of domino effect, with other PIIGS states leaving the EMU following a Greek defection.
Moreover, Greece leaving the EMU implies a default on their euro denominated debt, so a negotiated restructuring appears as a better solution for Germany’s export economy : the costs would be similar but Germany keeps the euro-zone alive.

The situation is less clear-cut for Greece. On the one hand, Argentina’s 2001 break off the dollar and foreign default was very successful.  After only one quarter of recession, their economy started growing, and has from 2002 to 2007 grown by 8.2% annually (in real terms), going above pre-crisis level in 3 years. It’s certainly better than the 8 years currently forecasted by the IMF (especially considering that they have proved over-optimistic until now). Argentina’s recovery was mostly due to the domestic economy – exports playing only a minor part – an important point to Greece, who has very little to export.
Obstacles to leaving the EMU are that Greek banks are up to their neck into their government’s paper, and would certainly need bailouts. It would mean massive inflation : as no one would want to lend to the Greek state, it would have to print money (especially as they import a lot). There would be important capital flights, as Greek citizen would bet on further devaluation – therefore swapping their assets back to euros.
Going back to drachmas might not be easy, but is a better solution for Greece than more of the same (a new bailout, or maturity extension of their outstanding bonds), so it would not be surprising to see them using this potential move to improve their negotiation position.

Given the unbalance in the relative political weights of Greece and Germany, we can presume that no decision of Greece leaving the EMU will be taken. However, in the current situation, if nothing is done to alleviate the structural problems of Greece and of the euro-zone, peripheral countries leaving the euro-zone is the inevitable conclusion of the crisis

Until now, the tendency of European decision makers has been to buy time using bailouts, and it appears they will continue to do so until forced otherwise. Of course, Greece’s problems are amplified rather than solved by bailouts, so whoever made this leak to Der Spiegel wants to improve the probability that a real solution to this crisis will emerge as the next step.

 

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