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Can the Euro Survive Grexit? Yes, No, Maybe

Posted on the 21 May 2012 by Periscope @periscopepost

Euro woes continue as Grexit edges closer to reality: Can the currency survive?

Euro woes continue as Grexit edges closer to reality: Can the currency survive? Photo credit: Matze Ott

The background

Commentators, central bankers and bookmakers alike think a Greek exit from the European Union’s monetary union is a sure thing. The indebted nation has been fumbling towards an exit ever since introducing some of the most severe austerity measures any euro nation has faced two years ago and what was once talked about in hushed tones is now on everyone’s lips.

Greece’s future in the euro rests on the outcome of its upcoming June 17 election, a vote that EU officials and commentators are seeing as a referendum on Greece’s remaining in the monetary union. If Greek voters back politicians who support austerity and therefore the rescue package as determined by the troika (the European Commission, the European Central Bank, and the International Monetary Fund), Greece may remain in the euro; if they vote against, Greece is out.

Ditch the euro? The Associated Press reports that some Greek are rejecting the euro before it rejects them

But Greece isn’t the only nation in the euro, a monetary union cobbled together from very different countries with very different economies, in debt – Spain, Italy and Portugal all seem poised for a fall, as well. If Greece goes, can the single currency survive?

The euro is doomed

“The euro is doomed to fall apart: no, not because I’m some nasty man in UKIP but because the basic idea was such a terrible one,” declared Tim Worstall, Senior Fellow at the Adam Smith Institute in London, at The Telegraph after the Greek elections on May 6 failed to deliver a mandate to Greek Parliament to persist in austerity. Worstall continued, “[I]t’s a blitheringly stupid idea to try and push countries into the same currency just because they happen to be next door to each other.”

Grexit is a moment of truth for euro

Noting that there is “no formal mechanism” for leaving the single currency, The Economist claimed that Grexit is going to cost European banks, firms and taxpayers a lot of money, not to mention the worries about contagion. A run on the Greek banks is a distinct possibility. Greece, therefore, is bringing forward a “moment of truth” for the monetary union, forcing the “financial re-engineering of Europe” that “is a prerequisite for the euro to survive”.

Eurozone credit downgrade likely

If Greece doesn’t come up with a stable, austerity-backing government in this next election, there is a greater than 50 percent chance that all 17 nations in the monetary union will face a credit downgrade, ratings agency Fitch said last week.

Grexit devastating for Greece – manageable for rest of euro

French bank Societe Generale, in a note issued by its economics team last week, claimed, “The direct costs of Greek euro exit would be huge for Greece, but manageable for the rest of the euro area. Our concern is contagion.” The bank was positively optimistic, declaring that a “speedy and forceful response” would be required to avert euro-wide disaster, but that luckily, “an extensive toolbox is already in place”. That “toolbox” could be further strengthened by allowing the European Financial Stability Fund, the mechanism that would handle bailouts, to become a bank in its own right, with access to European Central Bank funding. Too bad politicians don’t seem to be up for that.

ECB must be prepared to step in with funding

With contagion a big concern with a Greek exit, the European Central Bank must be on hand to stop the infection, wrote John Mauldin at “If and when Greece exits the euro, the ECB must be prepared to step in with massive funding of peripheral-country banks and sovereign debt. That is not within their charter today, but when the euro is at total risk, that is the only way to save it.”

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