Greece Has More to Lose from a Grexit

When the people of Greece go to the polls on 25 January, they will face some fairly fundamental choices. Contrary to what many politicians and commentators would have you believe, this election is not about whether Greeks want to stay in the euro – a majority clearly wants to. The real question is whether this latest turn in the drama will finally force Greek politicians to act in their country’s long-term interest.

Opinion polls suggest that Greek voters oscillate between anger and fear: anger about the enormous costs they have had to bear in the course of the adjustment programme; and fear of what would happen if Alexis Tsipras, head of the hard-left Syriza movement that still leads in the polls, tries to force through another cut in Greece’s international debt.

In the last debt restructuring in 2012, the creditors already promised to help Greece reduce its debt to more sustainable levels by 2020 – provided Athens continues to improve its budget. The Greeks have a democratic right to elect a leader who wants to tear up this agreement; just as Germans, Dutch, Finns and others have a right to elect governments that insist on such deals being adhered to. Although Tsipras says he does not want to leave the euro, the resulting showdown could force Greece out of the single currency.

Today, the spectre of “Grexit” is more threatening to the Greeks than to the rest of Europe. Reforms in Spain, Portugal and Ireland have made these countries more resilient. International rescue funds and the European Central Bank stand ready to help in case panic should nevertheless spread. Five out of Germany’s eight leading economic research institutes think the eurozone could now cope with a Greek exit.

This does not mean, however, that Germany or the other eurozone countries want Greece to leave. Even if contagion was limited, another worsening of the eurozone crisis would undermine confidence, stunt the region’s fragile recovery and make Europe’s leaders – many of whom have declared the crisis over – look inept. The political and economic consequences for other European countries would be severe.

Therefore, even if the rest of Europe does not want to be blackmailed, it will likely be ready to talk. The new Greek government, whether it is led by the incumbent premier Antonis Samaras, Tsipras, or a new coalition, could reasonably demand a new grand bargain under which the ECB-IMF-EC troika of lenders agrees to revisit the debt issue while the Greek government promises to make the economy fit for the future.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza