Eurozone: The political cost of a Greek exit

18th June 2012

However while the solutions agreed by politicians, central bankers or even the votes of electorates can bring some temporary respite to markets a few days or sometimes hours later markets usually retreat again.

That has been the pattern of the crisis so far as a long term solution has eluded policymakers.

This means that increasingly most political actions are viewed as temporary fixes. It is almost a cliché among experts that the economic fundamentals soon reassert themselves whether in stock market prices or perhaps in ten year bond rates for southern European countries such as Italy and Spain.

That means economics are key whether it is the beleaguered state of Spain's banks or the widening of Greece's deficit due to its flagging economy outlined brutally but brilliantly by Mindful Money's economics commentator Shaun Richards in today's post.

It is also the pattern reflected here in Citywire's report on the Greek election result this morning in its markets blog.

Citywire quotes Citigroup analysts note saying:

"Initial reactions from European officials welcome the outcome of the election, but made very clear that the there is little room for the new government to change the existing bailout programme.

"With this in mind, our probabilities for Grexit remain unchanged in the range between 50% and 75% over the next 12 to 18 months."

But perhaps markets and market analysts are discounting a bigger political picture or what might more accurately be described as a geo-political one.

Greece sits on a number of big political fault lines which perhaps should not be underestimated. Among others these include a difficult relationship with Turkey not least over Cyprus and more heat has been added to the situation with the prospect of natural gas drilling off the divided island.  

It is widely thought that Greek and Cypriot membership of the European Union has helped keep a lid on the worst of the enmity between those countries and Turkey. Tensions could rise were an exit from the Eurozone  lead to Greece's exit from the union altogether.

Greece also shares a border with several former Yugoslavian republicans where there are some territorial sensitivities not least over Macedonian. But the whole region to the North has a history of war and crisis the last in the 1990s.

Finally Greece itself only overcame its fascist government in the 1970s something many Greeks remember though that also applies to Spain and Portugal.

That means that when looked at in the context of broader regional stability, say for example from a US point of view, a Greek exit may have wider implications that often not considered.

Of course, it is unlikely that Greece would be abandoned. It would continue to be a member of the US led military alliance Nato and perhaps the EU, but there is an argument to say that just as it is often difficult to predict how economic contagion may proceed, perhaps the same is true for political contagion too.

Some actually link the eurozone crisis to the wider Eastern Mediterranean.

In the Telegraph economist Andrew Lilico links the eurozone crisis with Syrian instability and warns of the risk of widening local instability.

He says: "Israel, Cyprus and Greece are allies in the establishment of an Exclusive Economic Zone for the exploitation of potentially vast gas reserves in Cypriot waters – a venture that the Turks have expressly forbidden to proceed (sending a destroyer to express their displeasure), reflecting tensions over Northern Cyprus."

"The Cypriot powder-keg has just about been kept damp by the influence of Greek and Cypriot EU membership. But a Greek euro exit would very probably precipitate a Cypriot euro exit at around the same time (because of the very high exposure of Cypriot banks to Greece). The geopolitical implications of a euro exit by Greece and Cyprus presumably add to the pressure the US and UK are exerting upon the Germans to somehow keep Greece and hence Cyprus within the euro."

On this morning's BBC Today programme historians Miri Rubin and Laurence Reece worry that a split EU could see violent clashes, populist regimes and isolationism by some countries, patterns of behaviour which can even lead to war. There may be more than economic factors to take into consideration in keeping the Eurozone membership as it is currently.

Further reading:

Slate magazine gives an excellent round up of global implications of an exit while the Economist magazine describes the latest thinking on economic contagion and how it can occur under the heading economic epidemiology.

The New Scientist considers the implications for the health of the Greek populations and the chance of social unrest.

 

More on Mindful Money:

The Euro Crisis: Which countries will need help next?

Markets rally as pro-bailout party wins Greek election

The financial crisis and the benefit of hindsight

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