Grexit

Tuesday, June 16 2015

There was an interesting article by Alan Kohler on the possibility of a Greek exit (Grexit) from the European Union (EU) in today’s Australian newspaper (please note, this is a subscriber-only article).

A Grexit looks more and more likely

Essentially the article suggests an exit is more likely because the sides have not managed to close the gap in expectations. The Germans will struggle selling a deal which gives away more cash with no sign of greater fiscal discipline. The Greeks have promised they will not cut pensions or undergo the required fiscal tightening. Perhaps it is better for the EU to let the Greeks go.

For the Greeks an exit would cause substantial hardship including a recession, loss of wealth and unemployment. It would cause severe austerity given that they would no longer have access to financial markets to prop up their budget. However the substantial devaluing of their (new) currency and fall in wages would improve their competitiveness and they would likely begin a recovery (albeit from a low base).

Europe is better placed to withstand the fallout thanks to the quantitative easing being undertaken and it would strengthen the overall union.

Markets have been weak in anticipation and there could be further volatility on the initial announcement but once the Band-Aid has been ripped off, the uncertainty removed a recovery would ensue.

Having said the above we still suspect the can will be kicked further down the road with the Greeks and the Europeans making a few compromises to avoid the uncertainty an exit would represent.

 

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