The Greek government is running out of time and money. If there is no deal with eurozone partners to secure the final tranche of its bailout, there is a real chance it could default on its loans. That could push the Greek government towards leaving the single currency, a prospect that has become known as Grexit.
The real danger to the European project of Greece leaving the euro, of Grexit, is not if Greece then collapses into a howling wasteland of an economy. The danger is that Greece leaves the euro and then after a wrenching flirtation with that wasteland then succeeds as an economy.
This is what Paul Krugman an American economist says:
“But the bigger question is what happens a year or two after Grexit, where the real risk to the euro is not that Greece will fail but that it will succeed. Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover. This would greatly encourage challengers to austerity and internal devaluation elsewhere.”
“Think about it. Just the other day the Very Serious Europeans were hailing Spain as a great success story, a vindication of the whole program. Evidently the Spanish people don’t agree. And if the anti-establishment forces have a recovering Greece to point to, the discrediting of the establishment will accelerate.”
It’s always been a thing of wonderment about the Greek problems. The standard view, the IMF prescription, would have been, default, devaluation and a little bit of tightening up tax collection procedures at home. It’s only been the existence of the euro, that thing that makes devaluation impossible, that has led to this austerity and internal devaluation that has impoverished Greece so badly. It’s exactly the reason why I’ve been agains the euro all along: because we always knew that there was going to be some such shock at some point and a single currency, over such a large area, without fiscal union, simply cannot deal with such without that internal devaluation and austerity.
The European Union has worked hard to cordon off the banking difficulties of one member state from the other 27. But the IMF has warned that “risks and vulnerabilities remain” and the greater the talk of Grexit, the more nervous the markets become. Default would mean a steep loss for the ECB, with its €110bn exposure to Greek banks and around €20bn in the money spent on buying up Greek government bonds. As a central bank, the ECB could simply print the money to recapitalise itself, but that is considered anathema to Germany.
But there is more at stake than the markets. Several governments facing anti-euro movements are watching developments in Greece nervously.