EXCLUSIVE: Economists say practically no chance of Greece leaving euro

By Andrei Skvarsky.

The idea of a Greek exit from the eurozone is back in the foreground, largely because of upcoming elections in Greece, but three high-powered economists have argued in interviews with EmergingMarkets.me that there is practically zero chance of the country breaking away.

What has been dubbed as Grexit would spark turmoil in financial markets across the world, might ultimately ruin the entire euro project, a key pillar of the European Union, and would be a mixed blessing for Greece itself, it follows from the emailed interviews with the three experts.

So the EU would do its best to keep Greece in the eurozone, and both the incumbent Greek conservative government of the New Democracy party and the leftist Syriza coalition, which may form the next government after the January 25 elections, want Greece to stay in the euro, unhappy as they are with rigorous EU-imposed reforms, according to the three economists.

A Grexit “would be devastating for Greece and highly dangerous for the Eurozone,” said Charles Wyplosz, professor of international economics at the Graduate Institute of International and Development Studies in Geneva and director of the Geneva-based International Center for Monetary and Banking Studies.

“Greece will not just see its new currency collapse (like the rouble recently), but all those who borrowed in euros (everyone in fact) will face considerably increased costs to honor their debts. That would mean bankruptcies and bank failures.”

Philip Uglow, chief economist at MNI Indicators, an intelligence and research firm owned by Deutsche Boerse, said a Grexit would “spark utter turmoil on financial markets of a magnitude greater than the Lehman crisis of 2008”.

“The impact would be another long lasting flight to safety and intense pressure on the weaker members of the Eurozone such as Italy and Spain. The euro area would be plunged back into recession and the ensuing devaluation in the euro itself would hit world trade with exports from countries such as the US and China likely to be hit,” Uglow said.

According to Dieter Wermuth, a co-founder of and partner at German company Wermuth Asset Management, the default that would be part of the likeliest Grexit arrangement would entail adversities much too serious for Greece.

“Since a default of Greece means that Greek assets held abroad will be ‘attached’ by creditors, wherever they are (e.g. ships, foreign real estate), for decades to come, and it is impossible to run a current account deficit (i.e. borrow abroad), it is not likely that the country will choose this option,” Wermuth said.

Moreover, the three economists predicted that a Grexit would be the starting point of a process that would lead to the end of the euro.

“The whole process of European integration would be challenged,” said Wyplosz. “The realization that a country can indeed leave [the eurozone], or be pushed out, could well trigger a wave of contagion.”

Uglow said a Grexit could “sign the death knell of the ill-fated euro adventure itself”.

“Once one country has managed to leave, something Eurozone leaders have said could not happen, financial markets will never be able to view the Eurozone in the same light again,” he said. “Countries like Spain and Italy may at some future point look to a Greek exit and potentially see it as a preferred option as well.”

Wermuth said that, if Greece seceded, other eurozone countries might want to follow suit in order to avoid a default and that would mean that “euro membership is not forever – the present assumption – and the euro area could then easily degenerate into a fixed exchange rate zone, and the integration of the 19 countries into a banking and fiscal union would thus come to a halt”.

Wyplosz drew a grim picture of political trouble a Grexit would trigger in his opinion.

“In Greece, the crisis would come on top of many years of deep sacrifices. The already painful situation will grow much worse. Politically, people will feel that those sacrifices were for nothing. Political upheaval would be the natural consequence,” he said.

“In the EU, there will be a blame game, pitting countries one against another. The European institutions, the [European] Commission and the ECB [European Central Bank] will face a deep loss of confidence. The whole process of European integration would be challenged,” Wyplosz said.

Wermuth said the main source of the Grexit initiative is that “Greece wants to escape the diktat of the ECB, European Commission and IMF [International Monetary Fund], i.e. stop reforming, because reforming basically means cutting social benefits and reduce real wages”.

Partial writing-off of the country’s debts and reduced austerity measures are some of the objectives of Syriza, which is led by Alexis Tsipras and has a chance of winning slightly more votes than New Democracy in January’s polls.

Wermuth and the other two economists argued that the EU would do its best to keep Greece in the eurozone and that the next Greek government, whichever it is, would play ball.

“I think that even a far-left Greek government will quickly realize that an exit is financially worse than continuing austerity. The German government is probably bluffing [when it says Germany would be able to cope with a Grexit], and Mr Tsipras, the likely next prime minister, will have to accept the hard facts,” said Wermuth.

“Incidentally, if I am right,” he added in concluding his comments, “it would pay to buy 10-year Greek government bonds – they yield 1.25% right now.”

“Right now some people are trying to scare the Greek voters, which can backfire,” said Wyplosz.

“But once a new government is in place, even if led by Alexis Tsipras, the situation will be radically changed. The EU will not want to take any risk of a Grexit, nor will the new government. So they will sit down and negotiate. The new government will make some painful commitments and some of the Greek debt will be restructured,” Wyplosz said.

“The Eurozone,” said Uglow, “may be better prepared now to deal with the immediate aftermath of an exit in terms of contagion to other countries but I don’t think many in the Eurozone want to actually risk a ‘Grexit’ as the unknowns are just too great. Eurozone leaders will do everything in their power to keep Greece in the euro and are likely to blink first in any game of brinkmanship with Greece.”

However, Uglow and Wyplosz believe that, for Greece, an exit might have some upsides to it.

“My personal opinion is that while there are unpredictable consequences, a Greek exit combined with a debt default and a devaluation of the currency may be the best way forward for Greece itself. If Greece cannot afford to repay its debt, then better to default than inflict decades of pain on their citizens,” said Uglow.

Said Wyplosz: “Eventually, the deep depreciation of the new Greek currency [in the event of an exit] will boost exports and bring back reasonably rapid growth, but from a deeply depressed level. Meanwhile, the economic situation will be deeply disorganized, a little bit like in Russia after the collapse of the Soviet Union.”

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