Grexit's Cost for Europe

by Alexis Giannoulis and Daniel Wagner Alexis Giannoulis is an independent political analyst based in Athens.

Daniel Wagner, pictured, is CEO of Country Risk Solutions and author of the book "Managing Country Risk".

It has been more than five months since the new Greek government took office. In Europe, Syriza's election led to a sense of uncertainty, given its mandate from the Greek people to end austerity and discontinue business as usual with Greece's creditors. For the majority of Greeks, there was an unprecedented feeling of optimism and positive anticipation as a result of Syriza's victory. Today, many Europeans are more uncertain than ever about the unchartered waters they are about to enter into with the Greek government, and depending on what happens next, Greeks themselves may either reaffirm that electing Syriza was exactly the right thing to do, or that the economic pain Greece has felt since 2008 has merely been an appetizer compared to what may lay ahead.

Syriza came to power with a promise to change the entire approach to debt negotiations to steer away from unpopular austerity and better balance the burden among Greece's long-suffering middle class (the bulk of the Greek society) and the elite. Syriza promised a rise in pensions and state salaries, albeit gradual, and that no new direct taxation would be introduced. Instead, what has happened thus far is a drainage of cash from Greek banks, resurgent unemployment, a return to budget deficit, a failure to tackle tax evasion, and recurring problems with state pension and healthcare funds.

Surprisingly, despite this, Syriza and the coalition government continue to enjoy an unprecedented level of support. Just last week two major polls indicated support in excess of 70% for Greece's continued participation in the Eurozone. At the same time, less than half of those polled said the government should accept the European plan to be put forward. This is consistent with such strong support for the government, since some 60% of Greeks appear to be satisfied with Syriza's leadership and the manner in which it is handling the debt negotiations. In spite of the debt conflict with Europe, Syriza leads New Democracy in the polls by 10 to 20%.

It is clear that a "Grexit" is not on Greeks' minds at the present time, nor is it desired in any way, and direct reference to a Grexit has not been made by the government, but rather by individuals from within Syriza's "Left Platform" -- the far left faction of the party. It seems the West and the Western press are far more fixated on a Grexit than the Greeks themselves. It is therefore safe to assume that the Greek people would like to avoid any more 'tragedies' that would result from exiting the Eurozone. Continuing to be part of the Eurozone is the best and least painful way to put the economy back on track in the long-term - even if doing so has not exactly worked as planned to date.

A Grexit would not only signal the beginning of a new, darker era for the Greek economy, but would also admit the failure of all the painful austerity. A Grexit would furthermore likely result in unknown geopolitical and economic risks - not only for Europe, but the global economy. Recall that it was the 'ripple effects' of the collapse of Lehman Brothers which had such a profound impact on the global economy in 2008. A Grexit would likely result in tremendous loss of share value throughout the continent, the value of the Euro would be called in to question, the ability of other distressed European economies to avoid default would once again become a front burner issue, and the entire Euro experiment would be seen as a giant question mark.

A worse outcome than a Grexit would be a continuation of temporary 'fixes' and a pursuit of policies that have no realistic chance of succeeding. Rather than focusing on austerity measures, the parties would be well advised to focus on a credible path to growth for Greece. The issue is whether the two are compatible objectives. Anticipating that the two may not be compatible, the Greek government has started to explore other forms of international support and diplomatic affiliations, such as with Russia - although, given the state of economic affairs in Russia, that should prove untenable. Extra-European or extra-Atlantic affiliations have never helped Greece since its independence and have in the past created more problems than they have solved. The cold reality of the situation is that Greece does not have the luxury of a neutral geopolitical position, now or for the foreseeable future.

A Grexit would naturally prompt many Europeans to become even more disillusioned by the EU 'experiment', which could be reflected in the next round of general elections across the continent. This could in turn fuel an even greater rise of extremist political parties and secessionist movements. Surely, what is happening in the UK and Spain is ample evidence of this. While it is obvious that the current painful negotiations between Greece and its creditors must come to a swift conclusion, a Grexit will ultimately cost Europe as much, or more, than a possible 'haircut' of Greek debt. This will surely be on the minds of negotiators as the next deadline looms.

Editor's recommendation: Don't give Greece away!

Picture: Epidaurus Theater, Wikimmedia Commons 

Alexis Giannoulis is an independent political analyst based in Athens.

Daniel Wagner is CEO of Country Risk Solutions and author of "Managing Country Risk", please see below for link to Amazon. For Country Risk Solutions' web site, please click here.

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