Thursday 16 February 2017 4:01 am

As the EU sends an envoy to Greece to salvage the debt deal, would the Eurozone survive Grexit?

Vicky Pryce
Vicky Pryce is on the board of CEBR, former joint head of the Government Economic Service, and author of It’s the Economy, Stupid.

Carsten Hesse, emerging European equity strategist at Berenberg, says Yes.

Although tensions are flaring up again, it remains highly unlikely that Greece will leave the Eurozone. It has already done 80-90 per cent of the required fiscal repair and structural reforms and two-thirds of Greeks want to keep the euro. The current noise sounds like the prelude to a later compromise.

Greece accounts for only 2 per cent of Eurozone GDP. Even if it did leave the euro, European institutions have enough firepower via the European Stability Mechanism (ESM), the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) and QE to prevent contagion risks.

Mario Draghi’s statement in 2012 that he would do “whatever it takes” ended the euro crisis and narrowed government bond spreads considerably. The resulting OMT programme is the ECB’s strongest weapon. The ESM is a strong permanent firewall against contagion risks – it stabilised the Spanish banking sector in 2012.

The deep Greek trouble of mid-2015 caused no contagion to the wider Eurozone, just like problems in Puerto Rico don’t affect the overall US economy much.

Vicky Pryce, board member at CEBR and author of Greekonomics, says No.

The latest Greek crisis has resulted from a disagreement among its creditors over the sustainability of its debt, which stands at some 180 per cent of GDP. The IMF has so far refused to participate in the latest bailout unless there is debt relief or even more austerity.

Europe can’t write debt off in advance of forthcoming elections in the Netherlands, France and Germany. The Greeks won’t accept much more austerity. Talk of Grexit is therefore resurfacing.

But Greece is not unique – it is just a more extreme example of the problems of the institutional set-up of the euro and of ill thought out IMF-inspired austerity measures. Eurozone economies have diverged rather than converged since the creation of the euro, with a big divide between the core industrial countries and the “periphery”.

Italy’s debt stands at 132 per cent of GDP, Portugal’s at 130 per cent. Greece’s departure from the euro would not solve any problem. Instead, with Brexit rapidly becoming a reality, Grexit could jeopardise the entire euro project.

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