Would Grexit spell disaster for Europe's single currency?
- 1 July 2015
- From the section Business
The prospect of Greece leaving the euro has sent shock waves, not just through Greece, but also the eurozone.
Greeks can look to the examples of Argentina and Iceland to see what experience may await them after default and devaluation.
But the fate of the eurozone is more complex and uncertain.
With Greece making up less than 2% of the eurozone's gross domestic product (GDP), its exit might not have much of an immediate impact.
Most economists expect the European Central Bank (ECB) would step in to support bond prices against market speculation targeting the weaker euro members.
But after that? Some believe the crisis will impel the 19 countries using the euro to an even closer union. Others say the direct opposite, that the markets will pick off the weaker members one by one, reducing it to a euro-rump of diminished significance.
We canvassed the opinions of four economists and thinkers on how they felt the euro would fare without Greece.
Anders Borg, Chair World Economic Forum's Global Financial System Initiative; former Swedish Minister for Finance
Mr Borg believes the effect on the eurozone would be limited.
"If you look at how the stock markets have been affected - it's really not that bad. The exposure to Greece from individual banks has been limited and although the links to Greek debts for public institutions is strong there are no solvency or liquidity problems.
"It is very important we see appropriate policies put in place by the ECB. It needs to do what it is doing at the moment - monthly interventions in the market, clearly signalling that it will do whatever it takes to keep the euro together, and possibly even in the short term stepping up the amount they are injecting.
"A Grexit would have a negative impact on the euro economy but not by a large amount, perhaps reducing growth by 0.2-0.4%, but nothing like the effect of 2008 or 2010 as balance sheets have been cleared up and there is considerably more growth."
Stefanos Manos, former Greek finance minister
Stefanos Manos said: "I don't think the consequences for the euro would be that severe and I believe the European institutions have ring-fenced everything that would be damaged by a Greek exit. The euro might wobble a bit but it would not be damaged.
"It might instead scare people in Europe and force them to do more than they were going to do to create more of a union. Beside a banking union, they need some sort of fiscal union. So a Grexit would be a good reason to accelerate the process."
He believes Greece's future outside the euro would not encourage others to follow suit - in fact it would do the opposite: "We would be an example to avoid" he said.
Professor John Ryan, London School of Economics
Prof Ryan believes that the effects in the short term will be damaging to the euro but manageable.
But further out, he says there could be more serious problems. He said: "The effects could be incremental rather than immediate. The European Central Bank can sterilise the issue to start with, supporting the bond markets. But further out the markets will test the resilience of the periphery economies."
He also has less faith in the European banking system to withstand the impact of a Grexit. He said: "There have been stress tests done but there have been exemptions for some banks while others have not passed. I am not convinced they are as strong as they are made out to be."
Professor Ryan also doubts the ability of the euro members to forge a closer union.
"The bottom line was that in the cold light of day they are realising there isn't a willingness to do what is necessary to create a proper monetary union, with a fiscal union and especially a transfer union - transferring money from the rich countries to the poor - which has no support at all in Germany".
Vicky Pryce, former Joint Head of the United Kingdom's Government Economic Service
Vicky Pryce says she has always been sceptical of the eurozone's ability to function as a currency union without political union. She put the chances of its success as 50/50 when it was launched and says the chances are much the same now.
She said: "A Grexit would not change anything. A monetary union was always going to be hard and I always imagined we would get the odd country dropping out. And the prospect of instability is likely to push the euro towards more integration, as it has been damaged by what it has been through."
"The euro will still face the problem of having interest rates set in Germany which are right for the large core economies but not for the countries on the periphery."
She believes the ECB will immediately flood the market with liquidity and make sure that the European banking system is safe. It would therefore put off any thought of a rise in interest rates.
But she says it will be expensive: "There are some horrendous estimates coming out of German institutions of the costs of Greece defaulting on its debt. Even though a Grexit would bring with it some certainty for Greece it would bring uncertainty for the rest of Europe and that will weigh on growth."