With no deal on the cards, is the Eurozone too complacent about the risks Grexit poses?

A deal was not reached at the weekend to grant Greece bailout cash (Source: Getty)

Guy Foster, group head of research at Brewin Dolphin, says Yes.

It’s difficult to tell how complacent the Eurogroup really is about the risks of Grexit, as its rhetoric forms part of the negotiations. Both parties are citing a Grexit as their best alternative to a negotiated agreement. Their respective hands are strengthened as it seems benign for them and malign for their opponents.

Hence German officials claim “the danger of contagion is limited because Portugal and Ireland are considered rehabilitated,” while Syriza counters “who says that an exit from the euro and a return to the national currency is a catastrophe?”

A narrow analysis of international holders of Greek bonds certainly understates the immediate fall out from a Grexit, as countless other cross-border liabilities would become unserviceable by a devalued Greek currency. As Greece recovered, even if not to its pre-crisis per capita GDP, its notably higher growth rate would act as a siren call to other peripheral economies to abandon the now-compromised Eurozone.

Ruth Lea, economic adviser to the Arbuthnot Banking Group, says No.

Even at this late hour, I have little doubt the Eurozone’s leaders would prefer Greece to stay for political reasons. Nevertheless, it’s fairly clear that they now believe the Eurozone would not be seriously destabilised by Grexit. They are right.

The situation is very different from 2012 when the bloc experienced its “existential crisis”. It seemed that Grexit could trigger the departure of others, undermining the very existence of the Eurozone. Much has changed. Firewalls have been constructed to prevent contagion. Economic governance procedures have been reinforced and other peripheral members, especially Ireland and Spain, are recovering well. Contagion has recently been minimal.

There is speculation that a “successful” post-Grexit Greece could motivate other members to leave, but there is remarkably little popular desire to leave the euro. And any post-Grexit switch in political allegiance from the wealthy EU to a cash-strapped Russia seems most unlikely, whatever the fears.

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