In or out of the eurozone: post-election course for Greece

Agence France-Presse
Here are alternative scenarios for Greece's relations with the eurozone



BRUSSELS, Belgium РThe elections in Greece Sunday, June 17, are the second in 6 weeks seeking a coalition that can govern.

The country’s future course — and to a large extent the future shape of the eurozone and the wider European Union — may depend on these results and the negotiations between parties that follow.

From the most dramatic to the most unlikely, here are alternative scenarios for Greece’s relations with the eurozone:

#1: EXIT

Long taboo, what economists call “Grexit” shot to prominence after anti-austerity and anti-EU parties stunned Europe in the first election on May 6.

Should a coalition refuse to adopt reforms demanded in March in exchange for a second EU-IMF bailout, many feel it would then be game over and trigger an exit from the euro for Athens.

There are caveats here: for one, the EU could push for a “third round” of elections before taking drastic decisions. EU figurehead Herman Van Rompuy for one backs this approach.

However, a bank run could force everyone’s hands, and there could come a time when Greece runs out of acceptable collateral to back its promises.

However, significant EU work has already gone into “contingency planning” a more managed Greek exit from the eurozone.

This would eventually see the plugs pulled from ATM cash distributors on main streets across the country, investors blocked temporarily from taking money out of the country and the government operating for months on paper promises to pay future bills in “proxy” drachmas until a full, staged changeover at a time that suits markets.

Quite apart from the threat of major social unrest in a country already five years in recession, and spillover problems among eurozone neighbours especially Italy, Greece would then find itself with a heavily devalued national currency, facing a sharp spike in inflation, even higher unemployment and the danger of a vicious circle of depression, even if some exports became more competitively priced.

#2: REFUSAL OF AUSTERITY REFORMS, BUT EURO MEMBERSHIP HELD ANYWAY:

In this scenario, an anti-austerity coalition takes power in Greece but decides to remain in the eurozone, according to the wishes of three out of four Greeks.

But this would quickly end in an impasse as the financial lifelines offered by the European Union and the International Monetary Fund — to replace prohibitively expensive money-market finance — would quickly be halted.

Triggering default, Greek and other eurozone banks would suffer badly and there would be the same risk of contagion to members like Spain that ultimately could result in eurozone implosion.

#3: AN EASING OF BAILOUT CONDITIONS

Formally ruled out so far, and a hard sell to public opinion in countries which have shelled out on successive Greek rescues but who now face recessions of their own.

Nonetheless, ideas mooted include giving Greece an extra couple of years’ grace on certain public finance targets. Talks among eurozone finance ministers in Luxembourg on Thursday are likely to begin sketching out the realm of the possible here.

#4: FULL IMPLEMENTATION OF REFORMS

— The ideal scenario for eurozone partners would see Greece re-emerge from debt repayments with a leaner and meaner reformed economy after implementing reforms demanded by its international rescuers.

This is a long, long way off at best, say analysts. – Agence France-Presse