In my last
two
posts I covered what happened in the Greek elections and the potential
repercussions of those elections. Now
it’s time to look at what will happen to the EU. Aside from the previously referenced NYT and Spiegel
articles, I used a couple different sources (Krugman,
The
Big Picture, The
Reformed Broker, Kotok) for this post.
My key takeaways are as follows:
- Unless the EU renegotiates its rescue package with Greece, it’s highly likely they will leave the Euro.
- The chances of a renegotiation increased as elections in France and Germany indicate there is a growing backlash against austerity. Still, Germany seems dead set against a renegotiation and they are the key player.
- Even if the rescue package with Greece is renegotiated, given all the previous aid these appear to be stop gaps that just kick the can down the road
- Thus, unless there is a complete overhaul to the system (e.g. Eurobonds, ECB backstopping banks, etc.) it seems likely Greece will eventually leave even if another new stop gap measure is added.
- Despite the anti-austerity elections there just doesn’t appear to be enough support (e.g. Germany) for an overhaul and the support probably won’t come until Greece leaves and the rest of the EU has to deal with the fallout, which would be…
- Anybody’s guess. EU leaders appear to have enough resources to weather a Greek exit; however, no country has left the Euro before so it’s really an unknown.
- The real concern is a country like Spain or Italy having massive withdrawals from their banks as markets panic.
- If that happens the ECB will need to backstop the withdrawals and/or institute capital controls, then subsequently guarantee their sovereign bonds and put together some sort of fiscal policy (e.g. Eurobonds).
- Or let the Euro collapse, bringing on an even greater recession to all EU economies simultaneously.
- Again, the big risk here is not Greece leaving but the potential domino effect that it could create with other EU countries.
- However, the best case scenario is that the elections and a Greek exit are a wakeup call to overhaul the Euro and make it a workable currency.
