Beating Grexit

Thriving, Not Just Surviving

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The euro has so far defied any expectations that a Grexit heralds its own demise.
  • Why it matters

    Why it matters

    Germany is gambling that markets will view a Grexit as a blip in the euro’s history rather than the beginning of the end for Europe’s common currency.

  • Facts

    Facts

    • The euro has held its ground against the dollar since the weekend referendum.
    • Most bank economists around the world now consider a Grexit the likeliest option, but are more divided on the consequences.
    • German policymakers have been increasingly insistent that a Grexit may now be the best option – for Greece and for the remaining euro nations.
  • Audio

    Audio

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It’s perhaps the most baffling of all the developments these past few weeks on Greece. While headlines of economic doom and gloom have dotted the global media landscape as the Mediterranean country flirts with becoming the first nation to leave the euro, financial markets have barely batted an eyelid.

It could mean that the euro zone would not only survive but actually thrive without Greece.

The value of the euro against the dollar has held steady this week at around €1.10, even as many market analysts became increasingly convinced following Sunday’s referendum that a Greek exit, or Grexit, is the most likely scenario facing Europe. Borrowing costs for other weaker European countries like Italy and Spain have risen slightly but remain low. Most economists also expect the euro zone’s economy to continue growing, even if Greece plunges further into the abyss.

It’s a far cry from 2012, when the possibility of Greece leaving the euro infected the economies of its European neighbors like a virus that could only be stopped at its core – by bailing out Greece and keeping it inside the common currency.

The fact that market sentiment is different this time around plays very much into the hands of German Chancellor Angela Merkel and other Berlin politicians, many of whom are determined to play hard-ball with Greece and refuse to grant the country a third financial bailout unless it commits to the kind of tough structural reforms and austerity that its current left-wing government rejects.

The euro, many here in Germany argue, could actually emerge stronger from the crisis if it finally allows Greece to quit the 16-year-old currency bloc altogether.

“Over the long-term, the euro should profit from a determined stance by its institutions,” Ulrich Leuchtmann, senior economist with Commerzbank, Germany’s second-largest bank, told Handelsblatt this week.

“Certainly nobody wants to see it. But looking at the net gains or losses, we don’t expect a Grexit to destabilize the euro.”

Stefan Kooths, Kiel Institute for the World Economy

This is not about the consequences of a Grexit on Greece itself: Opinion here and elsewhere is divided on whether it would help or hurt Greece to reject the austerity path it’s been on for the last five years and leave the 19-nation euro. Most would agree there are no good options left for Greece’s own embattled economy, which has shrunk by nearly a third since 2010 and remains mired in a deep crisis.

But as Greece faces a final deadline of Sunday to reach a deal with its international creditors, policymakers and economists here worry that softening their tough line too much could actually be more harmful to the long-term health of the euro zone than letting Greece go.

Christian Lindner, leader of the pro-business Free Democratic Party, in an opinion piece for Handelsblatt this week said the crisis offered the chance for a “new start” in the euro zone. Europe had to confirm its founding principles as a market-based economy based on common rules, he argued.

It marks a sharp shift both in tone and argument from 2012, the last time there was a serious risk that Greece might leave the euro zone.

Back then, any German politicians suggesting Greece should leave – like Mr. Lindner’s predecessor as head of the FDP Philipp Rösler – were marginalized by the rest of the political establishment. Ms. Merkel and her allies argued that bailing out their southern neighbor was not only in Greece’s best interest, but necessary to avoid a collapse of the European Union’s signature project.

But Mr. Lindner’s view is no longer at the margins. While Ms. Merkel says she would still prefer to keep Greece in the euro zone, she and others have repeatedly emphasized over the past few weeks that the currency bloc is prepared to get along just fine without them, should it come to that.

“I am at the table here today to ensure that the integrity, the cohesion, the underlying principles of the single currency are protected,” Dutch Prime Minister Mark Rutte, a key ally of Ms. Merkel, said at Tuesday’s emergency summit on Greece. Whether Greece remained a part of that or not was Greece’s choice.

What’s changed? For one thing, the broader European economy is on its way up, rather than down. In 2012, a recession in the euro zone made policymakers more fearful of stoking the fire. The economic crisis led many in the markets to believe the entire euro zone was at risk of collapse.

Now, most other countries in the euro zone are growing again. That includes southern European countries like Spain and Portugal, though growth remains very weak. The shift from recession to growth “explains why markets are comparably confident” now compared to 2010-2012, said Stefan Kooths, head of economic forecasting at the Kiel Institute for the World Economy in northern Germany.

The European Central Bank has also provided a buffer: Markets remain convinced that the Frankfurt-based central bank will act to protect the integrity of the euro zone, even if President Mario Draghi’s famous promise in 2012 to do “whatever it takes” no longer necessarily applies to Greece. This helps mask the problems within the remaining 18 members of the euro zone, Mr. Kooths said.

This has also given policymakers in Germany the confidence to stick to their guns. As tough as austerity might be on the countries that have been subjected to it, Berlin and its allies still insist that it’s the only way to keep the currency bloc together over the longer term.

Economists here tend to agree. The key lesson of Europe’s five-year-long debt crisis remains that countries have to get their government finances in order, no matter how painful.

“Certainly nobody wants to see it. But looking at the net gains or losses, we don’t expect a Grexit to destabilize the euro,” Mr. Kooths told Handelsblatt Global Edition.

If anything, Mr. Kooths argued it would be more harmful to take the opposite, principled stand – that euro membership is irreversible for every country, regardless of whether it keeps to the rules or not. “That would certainly lead to a more significant weakening of the euro zone,” he said.

In fact, the mood has swung so fully in the other direction here that some argue Greece doesn’t deserve a bailout from the European Stability Mechanism. The rules of the euro zone’s bailout fund are that the money should be used to prevent a crisis in one country from spreading to others. Greece no longer applies.

“The dangers of contagion are no longer valid,” Gunther Krichbaum, head of an E.U. sub-committee in Germany’s parliament and a member of Chancellor Merkel’s Christian Democrats, said last week. “Additional aid for Greece on the basis of the ESM is out of the question.”

Not everyone is convinced the path will be so smooth for Europe if Greece is forced to leave. Nicolaus Heinen, senior European economist at Deutsche Bank, said it’s hard to decouple the economic risks of a Grexit from the political risks stemming from other left-leaning parties that are gaining strength in Europe.

“Should Greece really move further in the direction of a Grexit, this won’t leave the markets cold,” Mr. Heinen told Handelsblatt Global Edition. “The euro would not profit from a Grexit.”

 

Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, focusing on the financial markets. To contact the author: cermak@handelsblatt.com

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