6 January 2015

Politically and legally Grexit remains tricky and unlikely

First off, it still seems that Greeks want to stay in the euro. While a poll at the end of 2014 by Gallup International found that 52% of Greeks would prefer to have the Drachma over the euro, this seems to be something of a rogue poll. All other polls have consistently shown Greek support for the euro.

For example, the latest Rass poll published on Sunday in the Eleftheros Typos newspaper found that 74.2% agreed that Greece should stay in the Eurozone “at all costs”. Though of course, the crux of this issue is now the primary topic of the general election campaign – can you reject austerity and renegotiate debt while staying in the Eurozone? With negotiations on this now inevitable the outcome could see a crystallising of positions as hopes of having your cake and eating it are shattered (or not).

Agree 74.2%
Disagree 24.1%
Don't Know/No answer 2%

Greece must stay in the eurozone 'at all costs'

A poll conducted by Rass and published in Sunday's Eleftheros Typos newspaper found that 74.2% agreed that Greece should stay in the Eurozone “at all costs”, once again highlighting that the large majority of Greeks do not support Grexit.Source: Rass, Eleftheros Typos, Open Europe

Secondly, the key question remains whether Greece could leave the euro and stay in the EU. We argued in our 2012 report that this is possible, albeit difficult:

Contrary to popular belief, Greece would be able to exit the euro and still remain a full EU member, possibly using the EU treaties’ ‘flexibility clause’, followed shortly afterwards by a full treaty change. This would change Greece’s status from a euro to a non-euro member while allowing for temporary measures such as capital controls to be implemented. This would be a messy and highly unpredictable process, and all member states, including the UK, would have a veto over such changes, which could therefore be subject to various domestic political demands.

Better off Out? The short-term options for Greece inside and outside the euro, Open Europe, June 2012

However, this has debatably become more difficult as time has passed. The Eurozone has extended significant support to Greece and now has very large public exposure – 72% of Grecce’s €322bn debt is owned by its Eurozone partners and the IMF. As part of a Grexit it is assumed Greece would default on the nearly all of this. Furthermore, the Eurozone has bent many of its rules and given Greece some significant leeway to keep it in the Eurozone. The ensuing negotiations over Greece leaving the euro but staying in the EU would be fraught with animosity, to say the least. That said, compared to 2012 we now have the precedent of Cyprus, which has imposed significant capital controls (which would be needed in the course of a Grexit) while remaining in both the EU and Eurozone.

Has the balance of power in a Grexit shifted?

We have always argued that a Grexit would be painful for both the Eurozone and Greece, but relatively more painful for the latter. As such, it has always seemed unlikely that Greece would unilaterally seek to exit the euro. This still seems to be the case, though there have been internal shifts. As we noted in Part 1, the economic and financial contagion from a Grexit could likely now be more easily contained. This allows the Eurozone to take a harder line with Greece, not least since giving into SYRIZA, will send the message to Podemos and others that fiscal discipline etc is fair game.

So the Eurozone may be less nervous about Grexit and feel it has more reason to stick to the rules as it has laid them out, which may harden its negotiating stance. Equally though, Greece may have more reason to think a Grexit could be economically manageable, which could encourage a SYRIZA-led government to stick to its guns more firmly. This to us suggests the clash could be bigger and the negotiations more difficult this time around. Ultimately, though – with hundreds of billions of euros and the political project of the euro at stake – it still seems likely someone will blink and a fudge will be on hand as is usually the way in Europe. Allowing Greece to remain inside the euro for now.