We appear to be nearing the end of the fractious negotiations between Greece and the Eurozone and IMF, over the Syriza government’s demand for a significant relaxation of the debt repayment terms imposed on Greece in December 2012.
We know that the Eurozone and IMF have made a ‘final offer’ to Greece and that Greece does not have the funds to pay amounts owed to the IMF during the course of the current month. We also know that many Eurozone countries, including Spain and Ireland, plus others that are much poorer than Greece, are adamant that there can be no further compromise. We appear to be staring Grexit in the face. However, I am confident that will not happen, and that the Eurozone and IMF will compromise far more than Greece to avoid it.
The consequences of Grexit
If Grexit did occur, it is likely that Greece would default on most if not all of its foreign debts. That would leave the IMF with a 28 billion Euro loss. Plus every man, woman and child in France and Germany, would lose around 1,000 Euros – based on the 60 billion and 80 billion Euros respectively owed to those countries by Greece. I suspect that the remaining members of the Eurozone would stagger on for some time, but the Euro project would have been gravely, if not fatally, damaged. More seriously, Greece would be bound to seek financial assistance from Russia, with unpredictable consequences for the future stability of Europe.
Why Angela Merkel and Christine Lagarde will not allow it to happen
I cannot therefore believe that Angela Merkel and Christine Lagarde will allow Grexit to happen. It is unfortunate that the buck (or Euro) must stop with Angela Merkel, but she has willy nilly had to assume leadership of the Eurozone (and the EU) in the absence of a better mechanism for selecting leaders of the EU and its main institutions (as I discussed in my earlier post ‘The Leadership Vacuum in the EU’). It appears however that she well understands her responsibilities in the matter. As for the IMF and its leader Christine Lagarde, how would they deal with a loss of 28 billion Euros?
I am sure that both Angela Merkel and Christine Lagarde will have concluded by now that the risks of Grexit for the Eurozone and the IMF are far greater than they are for Greece. The Greeks would carry on post Grexit as they have done before, and without a massive yoke of debt around their necks. The rest of the Eurozone and the IMF would be dealing with the consequences for decades.
Another reason for humility on the part of the rest of the Eurozone is that they clearly made a mistake in allowing Greece to participate in the first place. Finance Ministers and civil servants in Paris and Berlin must have been aware that Greece was not ready for membership when it was allowed to join in 2001. The fact Greece is still not ready to participate does not detract from the original error, but it is now to late to correct that without disastrous results. So a new debt package will have to be put in place and Greece must somehow be helped along as it gradually reforms its economy and institutions to participate as a full member of the Eurozone.