The euro zone has become a political economy black hole
since the Greek economy is on the verge of collapse, German voters demanding more pain means there is little hope in the economic and political situation in Europe for Greece continuing in the euro zone. The political situation in Greece mandates noncompliance with the existing austerity regimen, which will result in European Union and International Monetary Fund assistance being withheld. Greece will have no choice but to default and exit the euro zone.
That’s my conclusion on Greece via today’s piece at US News. The full link is below.
Given how politically devastating a euro zone breakup is, I am still looking for other ways the euro zone can pull a rabbit out of its hat here.
In my latest member piece on the coming Grexit, I noted that you would need to see a massive infusion of liquidity into Europe if Greece exits. We’re talking defaults by the Greek sovereign and defaults by Greek corporates and banks or writedowns from New Drachma depreciation. The ECB and potentially the IMF would take hits and there would be Target2 problems as well.
Without going into the detail of my member posts, here’s what I would say that I didn’t say at US News: while it is clear Greece will eventually exit the euro zone, the real question is the timing. Although my post at US News makes it seem like a Greek exit is imminent, I still believe that we are going to see more ways of extending this because the euro zone is not ready politically for what the consequences of a Greek exit entails (bailouts, bank recaps, massive ECB intervention and a lot more). The political about-face necessary to prevent contagion is a lot larger than politicians are now prepared to take. Does that mean a swag is coming so Greece can default and remain in the euro zone? No one knows. Anything is possible. The situation is completely unpredictable. The euro zone has become a political economy black hole.
Source: Goodbye Euro, Welcome Back Drachma, USNews