Shadow Council

Grexit and its Discontents

Another face-to-face meeting could come tonight.
  • Why it matters

    Why it matters

    It could be another make-or-break week for Greece’s membership in the euro zone. Handelsblatt’s ECB “Shadow Council” of top economists is divided over the consequences that a Grexit would bring.

  • Facts


    • Economists supporting Grexit argued it could restore the bond markets’ supervisory function and force the remaining euro zone states to maintain fiscal discipline.
    • Detractors warned that Greece leaving the euro zone could unleash a speculative attack that would threaten the very existence of the currency union.
    • There’s also concern that a Grexit would encourage skeptical Britain to leave the European Union and provide inroads to Russia and China.
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Angela Merkel had tried her best over the past few months to keep the Greek crisis at arm’s length. Not anymore.

The German chancellor, who will host of a summit of leaders from the world’s seven top industrial nations known as the G7 this weekend, is getting her hands ever-dirtier when it comes to negotiations over whether Greece can remain inside or be kicked out of the 18 nations that form the euro currency bloc.

On Sunday night, she held “constructive” talks by telephone with Greek Prime Minister Alexis Tsipras and French President Francois Hollande. It was the second such telephone conference between the three leaders since Thursday.

The increasingly-urgent talks could continue in person Monday night. Greek officials said it was possible that Mr. Tsipras would travel to Berlin to join a meeting of Ms. Merkel with Mr. Hollande and the European Commission’s President Jean-Claude Juncker.

Ms. Merkel had hoped to keep the G7 summit itself free of talk about a Greek exit from the euro zone. But discussions on the sideline now seem unavoidable.

The crisis diplomacy led by Ms. Merkel makes one thing very clear: Negotiations have reached a decisive phase. Whether Greece gets the bailout money it needs from its international creditors or plunges into bankruptcy could be determined as early as this week.

Could the 15-year-old European currency union withstand the expulsion or exit of a member state? The question is just as polarizing for economic and finance experts as it is for politicians.

That polarization was evident at the latest meeting of the ECB “Shadow Council,” a group of top European economists Handelsblatt brings together several times of year to debate the decisions and challenges facing the European Central Bank.

“If Greece goes, then the character of the currency union changes and it comes something more akin to the European Exchange Rate Mechanism.”

Andrew Bosomworth, Pimco Germany

Rarely has the council been as divided as it over the tough question of whether the euro zone would be better off without its weakest member – Greece. Two major camps with diametrically opposed views emerged among the 15 economists brought together.

The exit of a euro zone member like Greece would be “an extremely naïve and dangerous political error,” warned Andrew Bosomworth, head of German operations for the asset manager Pimco.

Not so, said the chief economist of the French insurer Axa, Erich Chaney. He argued a so-called Grexit would actually restore the supervisory function of bond markets over the financial policies of the remaining euro zone nations.

Mr. Chaney and others argued that investors need to make countries account for their actions – for example, by demanding higher yields on sovereign bonds issued by governments that are not on a solid financial footing in their eyes. Their advice shouldn’t be simply be ignored.


Economists convened by Handelsblatt struggled to agree a common line on Greece. The Shadow Council includes, from left to right: Erik Nielsen (Unicredit), Julian Callow (Catalyst Economics), Jacques Cailloux (Nomura), Marco Annunziata (General Electric), Jose Alzola (Observatory Group), Jörg Krämer (Commerzbank). Source: Pablo Castanola


But the other side warned that these market forces are potentially dangerous. Investors can behave irrationally, and there’s also the risk that sharp movements are being driven by speculators who are merely hoping to profit from the euro’s collapse.

“If Greece goes, then the character of the currency union changes and it comes something more akin to the European Exchange Rate Mechanism,” Mr. Bosomworth said about the scheme that paved the way for the adoption of the common currency in 1999.

The ERM was a system that bound European currencies together starting in the late 1980s. A speculative attack in 1992 against the British pound by investor George Soros and others nearly brought the exchange rate mechanism to a collapse. The pound was forced to leave the system, which struggled on for another few years before being replaced by the euro.

Things could very quickly come to a head for Greece, too. Cash-strapped Athens owes the International Monetary Fund nearly €300 million, or $330 million, by the end of this week. While Athens has said it can pay the bill, it is unlikely to come up with another €1.23 billion owed the IMF by the end of this month.

Negotiations have now entered the critical phase. Athens’ creditors are still holding back €7.2 billion in bailout funds owed Greece under its existing aid package. The International Monetary Fund, which financed the bailout together with European countries, has been toughest in terms of its refusal to hand over any more cash without assurances from Greece to bring down its debt.

For those calling for a last-gasp solution between Athens and Brussels, Greece’s exit from the euro zone would also carry dangerous geopolitical consequences.

A British exit from the European Union could become more likely, for example. Conservative Prime Minister David Cameron has promised to hold a referendum on Britain’s E.U. membership by 2017 at the latest.

If Greece successfully exits the currency union and its economy begins to grow again, other euro members might be tempted to follow Athens example.

There’s also fear that the Greeks could turn to other blocs, such as Russia and China, for help if they feel deserted by their European peers.

“In the case of a Grexit, Greece could hardly remain in the E.U. and would effectively become part of the Balkans,” warned Elga Bartsch, the chief European economist at U.S. investment bank Morgan Stanley.


Shadow Council Unconvinced-01


Those willing to stomach a Grexit argue the currency union wouldn’t necessarily face an existential threat from financial speculation. The European Central Bank could guard against any such risk by buying up the bonds of countries that remain in the currency bloc, and also by deploying the funds in the E.U.’s rescue fund, known as the European Stability Mechanism, to prevent the risk of any contagion through the bond markets.

But while both sides share the view that the ECB could prevent an immediate contagion to other euro members, those skeptical of Grexit argue that the real speculative danger would come in the medium to long term – during the next economic recession in Europe, for example.

Economically weak southern European nations would be particularly vulnerable to the whims of market forces in the future.

That may be true, but the other side warned that keeping Greece in the euro at all costs comes with a whole different kind of danger for the currency bloc.


“Keeping a county in the currency union at any price, whose government doesn’t want to fulfill the agreed upon conditions, would send a very dangerous signal,” warned Marco Annunziata, the chief European economist of General Electric.

According to Mr. Annunziata, this would weaken the will to willingness of other crisis-hit countries to reform their own economies, thereby threatening the very foundation of the currency union. He was backed by others on the table, who warned that cow-towing to Greece could embolden other leftist movements in Europe.

“A money-for-nothing approach would strengthen the leftist Podemos movement in Spain and make investors nervous,” said Jörg Krämer, the chief economist at Commerzbank.

Like the Syriza movement that won the elections in Greece, Spain’s Podemos opposes the austerity measures that Madrid accepted in return for financial aid.

Should the crisis be averted and Greece remain in the euro, there was one thing the experts agreed upon: Greece should remain in the European Union, and even receive humanitarian aid to rebuild its economy.


Norbert Häring holds a PhD in economics and is Handelsblatt’s resident economics expert in Frankfurt. Jan Hildebrand covers politics for Handelsblatt in Berlin and Gerd Höhler is Handelsblatt’s chief correspondent in Athens. Christopher Cermak of Handelsblatt Global Edition in Berlin also contributed to this story. To contact the authors:, and

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