Grexit looking more likely

What would the implications of a “Grexit” be for the eurozone and for Greece? Allianz’ Chief Economist Michael Heise explains why a return to the drachma would be an economic disaster and why the eurozone will remain intact.
 

Allianz.com: What would be the consequences of Grexit for the eurozone?

 
Michael Heise : A Greek exit from the eurozone would doubtless entail strains and risks for the rest of the eurozone. A drag on the economy and temporary setbacks on the financial markets would have to be expected. Above all, however, taxpayers in the creditor countries would take a hit as Greece will doubtless not be in a position to repay the EUR 240bn in bailout loans in full. However, a breakup of the eurozone is not on the cards. Countries at risk of contagion are much better placed than they were in 2012: the past three years have been used to reduce dangerous imbalances and implement important structural reforms. Moreover, European crisis mechanisms have been reinforced and institutional reforms undertaken, for instance the introduction of the European Stability Mechanism (ESM) and the European banking union with joint banking supervision. And the ECB would do everything it takes to limit the risk of contagion for other peripheral countries. And finally, it is highly unlikely that other countries would follow the Greek example. The pressures on the citizens are already high and would be exacerbated further on leaving the euro.
 

What would be the consequences of Grexit for Greece?

 

For Greece, a return to the drachma would not be the hoped-for liberation, but an economic disaster. In 2014 Greece had successfully returned to the capital markets, unemployment was at least declining slowly and the economy grew for the first time after six years in recession. A default and a departure from the euro would demand further enormous sacrifices from the population. The social crisis would initially worsen further, with the risk of social unrest. The new currency would depreciate rapidly and the increase in import prices would stoke high inflation. Investors would be unlikely to grant Greece access to the capital markets for many years. Only after a long period would the Greek economy drag itself out of the quagmire and, on the back of a weak currency, start to export more. But Greece’s long-term success ultimately hinges not on the currency but on the reform and modernization of the economic system.


 

What happens next? How likely is Grexit?

 

After breaking off negotiations on a new bailout program, Greece has moved one step closer towards Grexit. The current bailout program expires on June 30 and, without additional financial assistance, the country faces insolvency very soon. A default will in turn call into question the continuation of ECB emergency loans (ELA) that are currently shielding the Greek banking system from collapse. Grexit can still be avoided, given the political will – particularly on the part of the Greeks. Even if negotiations resume, a tenable agreement between the creditors and the present Greek government is likely to prove very difficult. On the creditor side there is deep skepticism that the Greek government will implement a reform program it fundamentally rejects. It is possible that we will see fresh elections in Greece. That means that, even in the event of a positive referendum outcome on the reform package, euro exit is still relatively likely.

Allianz’ Chief Economist Michael Heise
Allianz’ Chief Economist Michael Heise

As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer:

 

Dr. Lorenz Weimann
​Allianz SE
Phone +49.069.24431-3737
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