Tag: Debt

Grexit, Too High a Bill and Too Big a Deal

Posted on by Camilla Crovella

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Since the question started to become more serious (2012), two different theories have been developed on the topic. The first one, known as the domino theory, states that a possible Greek withdrawal would lead markets to wonder which country could leave the Eurozone next. The fate of the other countries would then be questioned, similarly to what happened during the sovereign debt crisis in Europe in 2010-2012. The consequence could be an implosion of the Eurozone.

“a Greek withdrawal would lead markets to wonder”

Instead, according to the other vision, the theory of ballast, the Eurozone would actually be strengthened by Grexit. The monetary union would finally manage to erase a constant problem. Additionally, a decision to let Greece leave the Eurozone, or push it to do so, would increase the credibility of its rules.

In 2012, the former one seemed sufficiently realistic to push the creditor countries to put the option of a Greek exclusion aside. The German Chancellor, Angela Merkel, decided to officially visit Athens where she expressed her «hope and desire» that Greece would keep up being a Member.

Nowadays though, the situation is quite different. The rating agency Fitch has recently declared (6th March) that, although Grexit is still a concrete risk, Eurozone is now immune to risks contagion.

The Domino effect, Spotlight Europe
“Unlikely to happen”. (Flickr:Bro. Jeffrey Pioquinto, SJ/licensed under CC BY 2.0)

«The Eurozone has developed mechanisms to alleviate the risk of contagion and concerns about the solvency of other Member States are less evident than what they were like in 2012. A domino effect from Grexit is therefore unlikely to happen», remarked Fitch.

Indeed, adds the agency, the market stress has considerably decreased. The financial support programmes no longer support Ireland and Portugal, the Eurozone financial system has been strengthened by the decision to move towards a banking union.

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Grexit, Too High a Bill and Too Big a Deal

Posted on by Camilla Crovella
A Greek temple bathed in sunlight, Spotlight Europe
The Greek heritage. (Flickr: petros asimomytis/licensed under CC BY-NC-ND 2.0)

The European reality has always been crossed by threats of division and secessionisms due to its cultural and political diversity which constitutes both its weak point but also the basis for building its strength.

One of these aspects, which had remained a latent possibility in the last years, is now becoming more concrete; It has been nicknamed as Grexit, the hypothetical Greek withdrawal from the Eurozone.

“European reality has always been crossed by threats of division”

In February, the new Tsipras government reached an agreement with the Eurozone creditor countries, including a package of immediate reforms and an extension of four months of the financial assistance program. Even though Europe could feel relieved at the moment the compromise calls for tough negotiations on a new financial assistance program, to be introduced by the end of June.

In any negotiation the fundamental element that influences the behaviour of the players and then the final result, as Jean Pisani-Ferri, French economist, public policy expert and French government Commissioner General for Policy Planning recently observed, is the cost that the impossibility to find a further agreement would bring to the protagonists themselves.

To understand more deeply the phenomenon, it is important to focus on two key points: The actual legal provisions it could base its ruts in and the economic consequences of its realization.

Concerning the first aspect, under the Treaty on the European Union, the fundamental document of institutional regulation of the EU, it is written that «Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements» (Art. 50), but no provision appears to establish either the opposite process, an exclusion carried out by all the components against one Member State, or the revocability of the Euro – membership.

Andre Sapir, Bruegel, Spotlight Europe
Andre Sapir, Bruegel (Detail, Flickr: Department for Business, Innovation and Skills/licensed under CC BY-ND 2.0)

André Sapir, think tank Bruegel’s Senior Fellow, Professor of Economics at the Université Libre de Bruxelles (ULB) and former economic adviser to the president of the European Commission confirmed this. In an interview that recently appeared in several European daily newspapers, the Italian Il Sole 24 Ore, he affirmed that Grexit is just an exercise of «Phanta-politics». He also underlined that the other Member States would not accept to lose a Mediterranean politically and economically strategic point, such as Greece.

But what would be the bill generated by a possible Greek withdrawal from the Eurozone, in economic terms?

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Grexit, Too High a Bill and Too Big a Deal

Posted on by Camilla Crovella

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Despite these reassurances, as Jean Pisani-Ferri wrote, it cannot be stated yet that a Greek withdrawal would not bring any damage and this is mainly due to two reasons.

First of all, it would contradict the tacit assumption that participation in the Eurozone is irrevocable. This would create a precedent in European history and, if the climate began to be a bit tense again, there would be no certainty that another Member State would not follow this path.

“formalize the rules of quitting, so far unwritten and undefined”

Secondly, a possible withdrawal of Athens would force the European policymakers to formalize the rules of quitting, so far unwritten and undefined. This would naturally turn the risk of breach not only more acceptable, but also more concrete.

This does not mean, Pisani-Ferri added, that the other Member States should play any possible card or pay any possible price to keep Greece as a Member of the Union. But, on the other hand, the idea of a peaceful and effectless withdrawal of the country from the Eurozone is an illusion.

The Euro symbol in Frankfurt, Spotlight Euro
“In its complexity resides its strength”. (Flickr: MPD01605/licensed under CC BY-SA 2.0)

From the perspective of young generations it does not appear as hopeful future scenery, to know that the Greek tool would in any case pass on our shoulders too, once stepped in and established as agents in the labour markets. Despite this, it is crucial for a young European to learn how to think in a wider perspective; the European project is not a cup of tea to be set into reality, but in its complexity resides its strength too. Losing any part of this project would mean to damage it somehow. A human body still works without a hand but less effectively.

It is important that each young EU citizen understands this key aspect and accepts some small personal sacrifices in order for the whole machine to work better. There is a negative effectless way neither in losing a hand nor in losing the component of a Union.

This article has also been published by the European Sting.

 

About the author:
Camilla Crovella, Spotlight Europe
Camilla – Author at Spotlight Europe

Camilla (21) is a member of the Eustory Alumni Network and writes articles for online magazines. She studies Law at the University of Turin.