How will a potential Grexit affect the euro?

Пет години след началото на дълговата криза в Европа, катализатор за която беше Световната финансова криза, прераснала по-късно в икономическа такава, Гърция отново заема централно място в дебатите относно бъдещето на европейския валутен съюз. За разлика от 2010-2012 обаче сега основно внимание се обръща на Гърция, поради факта, че другите страни от периферията на Еврозоната (и не само) „успяха“ за момента да прикрият икономическите си проблеми, благодарение на цикличното подобрение в икономическата активност, задвижено основно от спада на цените на петрола и предоставените огрoмни количества монетарни стимули от страна на ЕЦБ. Абстрахирайки се от това каква е вероятността Гърция да напусне Еврозоната и какви са сценариите за страната в условията на собствена парична политика, ще се опитам да хвърля поглед върху потенциалните ефекти върху еврото и Еврозоната след Grexit.

In the short term, effects can be expected mainly on the price of the euro against other currencies, since the future of the entire monetary union is unlikely to be predetermined by the departure of one of its members alone. The effect on the price of the single currency is not easily predictable, given the many additional factors that need to be taken into account. In the foreseeable future, the price of the euro will most likely fall, due to the uncertainty that the Grexit precedent will cause. Most participants in the financial markets do not like the unknown and accordingly there is a high probability that the euro will lose its value in the days immediately following the official announcement of Grexit, and this process will be accompanied by strong fluctuations in the search for a temporary equilibrium price. In addition, Greece's exit from the Eurozone will lead to additional stimulus from the ECB in order to limit the "contagion" of financial markets, and the growing balance of the ECB automatically means (other things being equal) a weaker euro.

In the medium term, however, the price of the euro will depend a lot on the consequences of Grexit on the other Eurozone countries. If we isolate Grexit and assume that the monetary union will continue to function normally after the loss of one member, without this having an impact on the other members, then the departure of our southern neighbor should have a positive impact on the euro, as the single currency will “lose” one of its “disobedient” members. If we assume that the price of a currency (mainly) reflects the state of the economy, then the Eurozone will be economically stronger without Greece. This effect can be examined in more detail through the prism of money flows and their influence on the price of a currency. This can be seen most easily in the Eurozone current account, which is expected to have a higher surplus (respectively lower deficit) without Greece, which means more demand for the euro from economic players outside the currency union.

In the long term, things are much more unclear and it all depends on how a potential Grexit will affect the future of the Eurozone. Grexit would be a precedent in the history of the Eurozone and despite the lack of a procedure for removing a country from the monetary union, we cannot deny that the probability of this happening is currently very high, especially given the result of the referendum on Sunday. The effect of Grexit will depend not only on the actual exit (expulsion) of Greece from the monetary union, but also on possible measures towards the forgiveness of the Greek public debt. The issue here is quite sensitive due to the fact that a possible forgiveness of part of the Greek debt (the IMF has already officially calculated that the debt is unsustainable and needs to be reduced) would trigger a desire for similar actions from countries such as Portugal, Cyprus, Ireland, Spain, which also received financial assistance during the crisis. This is a difficult political decision, although from an economic point of view, many economists familiar with the economies of the countries on the periphery of the Eurozone (Ireland is an exception here) are aware that a large part of the loans distributed by the Troika cannot be repaid in full. We should not forget the geopolitical side of things, and the possibility that Greece will seek closer ties with countries from the east if it is thrown out of the monetary union. Such a relationship could also be followed by leaving the EU (with further radicalization of voters as a result of the crisis caused by the switch to the drachma), which European leaders are certainly worried about and therefore seek to maintain a balanced approach towards Greece. In short, while in the short term the price of the euro may take different directions of movement as a result of Grexit (although it will most likely go down), in the long term things are much more complicated and it can rather be said that the future of the single currency is at stake.

The last 5 years of economic stagnation in the Eurozone have proven the thesis supported by many economists for many years, namely that the euro is a failed project, at least in the form in which it exists today. Many economists would also defend the thesis that the euro will work if the European institutions manage to implement mechanisms for direct fiscal transfers and a well-functioning single banking supervision. While the latter is partly already a fact (although the project for a common banking union, which consists of three pillars, is unlikely to exist in full force), it is difficult to imagine how direct fiscal transfers will be implemented, given the growing opposition in some northern countries and the growing strength of Eurosceptic parties in Europe.

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